Fighter's History Dynamite is a 2D versus fighting game similar to Street Fighter II. It takes place one year after what happened in Fighter's History. After being defeated in The "Great Grapple", a martial arts tournament organized by himself, the mysterious K invites fighters from all over the world once again. The nine characters from the previous game (Ray, Feilin, Ryoko, Matlok, Samchay, Lee, Mizoguchi, Jean and Marstorius) are present, along with two new ones (Yungmie and Zazie). The two hidden characters from the previous game, Clown and Karnov, are also available as playable characters in this game.

Each character has two punches (light and hard) and two kicks (light and hard) and one or more unique throw moves. Special moves are performed by using control sequences such as moving the directional pad down, down-forward, forward and pressing a punch button. Combos can be performed by connecting sequences of moves. A "one-two attack" system was introduced in this game: pressing a hard attack button while performing a light attack or blocking reduces the interval between light attacks, making combos easier to perform.

There are two rounds in each stage, and the object of each round is to drain the opponent's energy in order to win the battle. If there is a tie after two rounds, a third round is played. The animated background for each character changes from the first to the second and third rounds. There is a time limit, and if this expires, the player with the less energy loses. The game can be played in single player or two player versus mode.