Players continue Sackboy's journey after the events of the first game and the portable version. An inter-dimensional vacuum cleaner appears over the skies of LittleBigPlanet and begins to suck up its inhabitants, including Sackboy. Larry Da Vinci, the leader of a secret organisation known as "The Alliance", comes to Sackboy's rescue saving him from what they call "The Negativatron." The organisation is dedicated to battling with "The Negativatron" and defeating it before it destroys the whole Cosmos.
While still retaining the three-layer, 2.5D nature of the original title, with the player controlling their Sackboy characters, players are not restricted solely to platforming levels, and can now choose to create many types of levels including racing, and puzzle and role-playing games. The player may also chose to create and customise their own heads-up display to accommodate their game type. New animation recording options are available and players will be able to create full-motion cut-scenes to go with their level design, manipulate the camera for both cut-scenes and gameplay, and record their own sound effects for use in the level. Multiple levels can also be linked together, so that finishing one level immediately takes them to the next in the series. EnlargeSackbots can be programmed to follow Sackboy.A new tool to assist in gameplay creation is the "direct control seat". This allows players to assign specific actions, such as button presses or Sixaxis motion control, to specific aspects of their gameplay design. Players are not restricted to using the direct control seat on level elements, however, and they may use it to direct the actions of the player's Sackboy character, allowing greater freedom of movement; Media Molecule made this design choice in response to the large number of homages to early platforming games, in which players had to "hide" and manipulate the Sackboy character in specific ways to replicate the style of gameplay. In addition to this tool, more gameplay items, similar to the Metal Gear Solid paintball gun released as downloadable content, will be available, beginning with a grappling hook; Media Molecule plans to regularly update the game with further items.
Enemy creation has also been improved. Players can now create "Sackbots", which are non-player characters whose AI can be controlled by the level creator. Options include determining weak points on the Sackbots, as well as programming routines for the AI to follow. Sackbots can be customised using costumes and decorations in the same way that the player character is and the AI for may be copied and pasted between mulitple Sackbots. Sackbots may also be controlled by the aforementioned direct control seats.
All downloadable content from the first game will be usable in this sequel, as will most user-made levels from LittleBigPlanet. Players will be able to use a keyboard and mouse to edit levels.
The online community of the game will also be improved with the creation of the LBP.me website. From there, players may synchronise with their PlayStation Network IDs in order to check statistics on their own levels, as well as find new levels from the community, where they can queue them for automatic download when their PlayStation 3 is next online. Further to the official community website, improved API features mean that scoreboards and photos taken within the game can be displayed on a player's website or blog; website owners may also use the API to add live feeds and data from the game itself. Creators will also be able to generate QR codes for their levels. When scanned by a compatible device such as a mobile phone, they will provide a link to the level on LBP.me or will take the user directly to a level if scanned in-game using the PlayStation Eye.
The game was first hinted at by a Sony representative in March 2010, who stated that the game was in production and would support PlayStation Move controllers, and in April 2010 by musician Ochre who revealed one of his songs had been licensed for the game. It was then formally revealed by video game magazines Edge and GameInformer in their June 2010 issues. On 8 May 2010 Media Molecule officially confirmed that they were developing LittleBigPlanet 2 on their Twitter account and hinted that the game would be formally revealed on Monday 10 May 2010. On 10 May 2010, the official website launched an announcement webpage and news article announcing the game with game details and an announcement trailer. The announcement was also made on the PlayStation Blog with a Q4 2010 release date. Numerous gaming websites reported about the game when an embargo lifted, including EuroGamer and IGN.
In October 2008, BBC reported before the original game was released that Media Molecule had already begun development of a sequel to LittleBigPlanet. The statement was later clarified in an interview with IGN, in which Siobhan Reddy of Media Molecule stated, "we see LittleBigPlanet as a platform... There will be a lot of additional content and it will vary in size and what it does. And we've already started that, yes." The "huge emotional investment" users have made in LittleBigPlanet, Alex Evans stated, is the reason he does not want to ship a traditional sequel. Because they don't want all of the user-generated content to be made obsolete, their focus will be to "expand the game without partitioning the audience".
In July 2008, Media Molecule mentioned that should there ever be a LittleBigPlanet sequel that the game would feature backwards compatibility with the original game's user-created levels. In November 2009, Media Molecule had said that it had no plans for LittleBigPlanet 2 as they believed that it would fragment the community, calling it "the most counter-productive thing you could do".
On 23 March 2010, IGN reported LittleBigPlanet 2 was in production and would support the upcoming PlayStation Move controller. Sony later denied this report saying that future content for the original title would be compatible with PlayStation Move. Later on in May, along with the release of the trailer, Sony confirmed that LittleBigPlanet 2 would be compatible with Move.
Stephen Fry will return to narrate the game.