The great value of applying digital games in language learning has been highlighted. However, there has been a lack of attention paid to the effects of prior knowledge in a contextual game-based language learning environment. To this end, this study developed an MMORPG-based educational game to facilitate English learning, aiming at investigating how students' different levels of prior knowledge, in terms of their prior English ability and online gaming experience, affect their learning performance and anxiety. The results showed that the high English ability students significantly outperformed those with low English ability, the low online gaming experience students significantly outperformed those with high online gaming experience, and the low English ability students experienced significantly higher degrees of anxiety than those with high English ability. Furthermore, the results showed that prior English ability was positively correlated to learning performance but negatively correlated to anxiety, and anxiety was negatively correlated to learning performance. These findings suggest that a contextual game-based learning environment can be exploited as a useful tool to support language learning; however, the learning performance and anxiety created by the environment were affected to varying degrees by the levels of students' prior knowledge.