As the Dark Knight himself, you must survive a night in the Asylum (which rivals Rapture in terms of atmosphere), surrounded by a good portion of his Rogues Gallery, to stop a plan sprung by none other than The Joker...voiced by Mark Hamill, no less. The tone is essentially a hard T-rating. Considering among other things you see a man's spine rip out of his back, close-up, it's frankly astounding it did not wind up with an M rating.
And then you actually have run-ins with Scarecrow and his fear-inducing toxin. With little more warning than a cough from Batman, you get told off by his zombified parents, relive the night of their murder from the perspective of little Bruce Wayne, and get eerily unusual radio messages. To top it all off, each hallucination culminates in a platforming segment through an area that is part black hole and part Silent Hill, evading the killer gaze of a ten story tall Scarecrow. And then, he starts messing with you, the player, directly...
And if he sees you, the dread you feel knows no bounds. And some of the things Scarecrow says if you die to him are terrifying.
Scarecrow: "Now madness takes you... forever..."
The morgue area, where Batman falls prey to Scarecrow's literal Nightmare Fuel and sees Gordon die (And having to tell Barbara only to be greeted with radio silence) followed by his dead parents. Scarecrow's redesign is ridiculously creepy in of itself, but when you wear a freaking syringe glove, that's kind of expected. (Yes, we know Freddy Krueger did the pointy-glove thing first. It was creepy then, it's still creepy now.)
Creepier still is that the door you use to enter the morgue during the nightmare only leads out to another section of the morgue instead of the hallway you entered from...
And then he pops out of a body bag! What's creepier: the hallucination itself, or the realization that Scarecrow would more than likely actually do that?
In the French language version the chanting voices are Thomas and Martha Wayne themselves (or at least sounds exactly like them)... and now you get Martha's screaming something that sounds a lot like sang... French for blood, naturally. It's a little disturbing.
There's also the chanting when you first "enter" the morgue:
Paranoia Fuel sets in real quick if you don't catch the hint to leave the morgue and instead stay, expecting Scarecrow to be somewhere in there. The movement you keep catching, just out of the corner of your eye? Just the hatch to one of the drawers (which are constantly opening and closing)... right?
And the third and final time Batman succumbs to the same gas, with the faux console freezing. There are several hints for the alert player that this is a Scarecrow moment, but it's still masterfully done.
About the only clue to the hallucinations is Batman coughing. For the last one it follows a creepy voice asking, "Did anyone see the game last night?" That itself is creepy, but it masks the coughing. Then the game freezes and restarts. Even for those aware of the scene it can catch you off guard, first time it's seen until the twisted Bat Signal appears, even past where we see Joker driving the Batmobile, it very much looks like the game had crashed. Bonus points for the line being something that would cause a crash in a faulty game.
When Batman is brought into the Asylum on a gurney in the fear gas-induced vision, he screams that he's not insane. Just the thought of the always calm and stoic Batman screaming for mercy is chilling.
And at the end of the sequence, the Joker shoots Batman in the face, prompting the game to inform you that you failed the mission Prompting you to "use the middle stick to avoid being shot". Choosing 'Retry' will take you to the next part of the game, but the moment you see that screen is just terrifying. It probably won't be the first time you see the Game Over screen, but in this instance, you're left feeling utterly helpless since you have no idea what you did wrong.
For one of the Riddler Challenges, you find Scarecrow's lair in one of the elevator shafts in Intensive Treatment. It's a Room Full of Crazy with map layouts of the whole island and photos of Batman in the Asylum. He is stalking you the whole time.
Arkham Island's a low-level war zone, filled with insane inmates, gun-toting nutjobs and several other Bat-rogues—all of whom seem either fear/respect/get gassed by Crane enough to let him pass by without question. The whole time. It's damn creepy at best, and a serious upgrade for the good doctor.
KillerCroc's lair. You are walking through an abandoned, labyrinthine sewer, supported only by panels of rotting wood, walking as slowly as possible so that Croc doesn't get the drop on you, knowing full well that he can surface at any time, with only a short warning. And then, once you have made your way to the most remote corner of the area, Croc gets hungry.
Before that, Killer Croc eats Scarecrow.
However, one of the after-game cutscenes shows that Scarecrow survived.
Enter the holding cells of the Penitentiary and don't get creeped out by the rabid inmates. They aren't so bad after they're released and scatter, but while they're still imprisoned?
After they've been released, a couple of them hide in the ceiling, where Detective Mode can't pick up on them. You go near them, they drop down, scream and leap on top of you.
Another one - the visitor center. Dear God, the visitor center - the fact that it is the only area in the entire game in which you're forced to use first-person view makes it worse, as does the implication at the end of the game that the Joker was in there every time you entered it.
A little game to play. Go into the visitor center, say hello to the Joker mannequin. Then turn around and head back to the door. Before you leave, look back. Something wrong?
Another tidbit. After the second time you enter the Visitor's Center, the only thing Joker does when you approach the mannequin is laugh... and laugh... and laugh... and laugh...
Here's an in-universe example: enter the center after you get into the access for Intensive Treatment. Joker will wax philosophic to Batman about how their rivalry might end. He feels that one will kill the other, but the winner might not know what he'll do afterwards. If he's being honest, Joker is terrified, not about being killed or winning, but of what the winner will do.
And another: Zsasz has just grabbed Dr. Young and has dragged her round a corner with a knife to her throat. She's pleading with him to let her go, the Joker's watching from the security cameras cheering him on, he's on the verge of snapping completely from the pressure and killing her anyway and you're around the corner with a Batarang aimed. Oh, and if you miss, she's going to die. Good luck!
Some people like to wait out and listen to all of the dialog of a scene before acting, it's a common thing some gamers do. You do that here, Zsasz kills Dr. Young. Oops. Joker even taunts you, saying "Who would of thought the psychopath with the knife would kill the poor, innocent doctor?" He has a point.
The worst part? No matter what you do, whether you save her or not, she dies anyway no more than three minutes later.
The Chronicles of Arkham. The Asylum's founder, now existing as a spirit in the walls of his own institution and ready to lobotomize pre-criminal Harley, have the killer of his family strapped into an electric chair and slowly fried to death, set Poison Ivy on fire and beat schizophrenics to death to "clean the scum of Gotham City." Granted, none of his victims are exactly angels themselves, but...
The scariest part about all this is that the Chronicle of Arkham is not really the spirit of Amadeus Arkham, but the current Warden believing himself to be the reincarnation of Arkham. All of the references he makes to any Arkham inmates are the super-criminals that Batman has put there, such as Joker, Poison Ivy, and Killer Croc, as well as a sane Harley Quinn (before she joined Joker). The final riddle of the game is to figure out who he is. The last Chronicle you scan is written on the floor of the security station where you rescue the Warden, and it's just a circle with BATMAN written over and over again. His last message is that he wants you to continue on his work. Creepy. Also through out the entire asylum there are posters which hint at this seeing them when playing the game a second time is truly eerie.
This results in the Asylum having some of the most nightmare-inducing scenery ever seen when you realize the Asylum wasn't created to cure, but to punish. In the maximum security section of the prison, above a bunch of holding cells for the most delusional inmates, surrounded by electrified floors. In massive letters on the wall reads the phrase "Mors certa, Hora incerta". It's Latin for "Death Certain, Hour Uncertain". The Green Mile (not to be confused with The Green Mile) is down the hall.
Same area, "Liberate Me Ex Inferis." Can be translated as "Save me from Hell." If you saw Event Horizon, this might add some additional creepiness.
Also Homo Homini Lupus (Man is a Wolf to Man). The maximum security cell block is a treasure trove of ominous Latin.
A single line in the Spirit of Arkham's profile: "Profession: Executioner." After listening to all of his audio diaries, you realize that a cold-blooded Knight Templar can be even more terrifying than every single Card-Carrying Villain who appears in this game, combined. Best of all? He gets away with it. He claims that Batman has inspired him. You can't find him anywhere else in the game, implying he left the island to do his work.
It gets so much worse In the sequel, he's the mayor.
And if you find his secret office (as seen here  you can see what his real objective is (this is also a foreshadow for the second game)
In an in-universe example, you are the Nightmare Fuel for the Asylum mooks, swinging down from the rafters... cause you're the goddamn Batman. From the nervous chatter that the enemies give out, even when outnumbering and outgunning Batman by six to one, it's clear who's the prey. If not, keep dwindling their numbers and watch them look over their shoulders in jittering fear... and shooting at any small noise (whether provoked by you or not). Just watch as a group of enemies comes towards you. Don't attack them right away. They'll hesitate, until one of them gathers the courage to attack.
Pop over to detective mode watch their moods as you attack them. Prior to Batman's assault, they're calm. Once he starts picking them off one by one, they start becoming nervous, then terrified.
"Did anyone hear the one about the escaped mental patient sneaking around and killing the guards one by one? No? Stick around..."
Most of the audio tapes, particularly the Riddler's — Arkham Asylum took advantage of the Riddler's canonical craziness and made him a legitimately scary villain — and Zsasz's, leading up to Dr. Cassidy home alone, Zsasz on the loose, and somebody at the door...
Thankfully, she survives and makes a few appearances in the Medical Facility. In the minicomic that came in the gamebox it's revealed that Batman had saved her thanks to an anonymous tip... Which is hinted to have come from Joker...
The Medical Facility is easily the creepiest building on the island. The only one that comes close is the Penitentiary which is filled with screaming psychopaths in cells and still not as creepy as the Medical Facility.
In the halls in said Medical Facility you have to go down to save the doctors, there are these weird plastic medical curtains that hang down from the ceiling. Occasionally, you will see them move without there being anyone to move them. Batman hasn't reached those curtains yet, and they still move like someone just walked through them even when there's no goons in the hallways left to beat up, so who or what is making those curtains move?
Go find the head in a jar. It's not even part of a puzzle, or anything. It's just... there.
One of the Joker's quotes in Medical is especially terrifying, as he drops all pretense of comedy and just goes straight into telling his henchmen they're in for a world of suffering.
Joker: "Are you scared? Lonely? Good. I said protect Medical and you have failed me."
The perfectly ordinary announcements that come over the PA system before the Joker takes over (especially the ones in the Medical Facility) just make everything else seem that much more hellish. One of the worst occurs in Intensive Treatment, right at the beginning of the game after Joker gets free and releases all the Blackgate inmates. It starts like a normal security level message, and then devolves into insane laughter.
Go back into that sewer/boiler room area in the Greenhouse you have to go through to get to where Poison Ivy is after you find the Titan production facility (but before you enter it to fight the Titan goons). If you climb up to a certain point, which you need to do in order to get to most of the riddles, a dead, mutated goon that was part of the Joker's Titan experiment drops out of a pipe. Right in front of you. Panic ensued.
The cage for Killer Croc at the bottom of the Sanitorium. It has claw marks and broken steel bars, filled with skeletons, bloodstains, and human bones. Croc makes several comments in his interview tapes about eating his victims. You do the math.
Speaking of Croc's interview tapes, the first one is just low, angry snarling...
If you try to go through the door to the sewer area before you have to, Killer Croc pops out and smashes against the door out of nowhere.
His quote really sets it:
Killer Croc: I will find you, rip your flesh like paper.
If you die via Poison Ivy's vines, you go limp and get dragged into the ground. Christ.
Remember in the nooks and crannies and hidden areas around Arkham, how some of them would be filled with debris? Sometimes just looked like places where Joker planned his takeover, but once in a while you'd stumble upon an obvious living area. It can be implied that patients who couldn't quite escape the island, but escaped their cells to live in the forgotten recesses of the compound, eating mushrooms, licking moisture off walls, sleeping in gathered straw beds. Many living areas also have human bones, and one had a full human skeleton and a single candle. Sad and scary when you consider they preferred that "freedom" to whatever their incarcerated lives were like.
There is a rat with a human-sized bite taken out of it in the ventilation ducts right outside Doctor Young's office. Think about that for a second.
After you complete the game, you're free to wander around Arkham Island to finish all of the collectible stuff you didn't during the initial story missions. Even after Arkham was cleared of all its escapees, the sheer atmosphere is unnerving enough. What makes it all the worse is the pure desolate emptiness of the place as you wander through it.
The fact that all the damage that's been done to the place is still there (no one's even tried to remove Doctor Young's corpse) and the few remaining guards and doctors, like Aaron Cash, are still standing around as if they're still trapped - go to the medical ward and Dr. Cassidy and company are still hiding out behind stacked hospital beds. Even though they're free, they haven't escaped, they're still afraid of what will happen if they walk out the door.
Clayface's cameo is cool, but fairly creepy as well. He's locked up in his cell, and you never see him in his clay form. He's disguised as Aaron Cash, Sharp, or Gordon whenever you visit him. He's always changing his disguise, too. If you pan the camera away for just a second, you'll hear him morphing. Look back and, sure enough, he's impersonating someone else. As Cash or Sharp, he will try to trick you into thinking he's the real one, and begs you to let him free (You can't, anyway). However, as Gordon he will just laugh if you talk to him. Just laugh... and laugh...and in one instance that has never since repeated itself, Clayface does speak as Gordon. He tells you that the Warden certainly ran off in a hurry. And isn't that strange, since you told him specifically to stay put, so what could he be up to...? What indeed.
Speaking of cameo villains, there's Ra's Al Ghul too. When you get to the morgue, you can see he's in one of the drawers (you just know it's him by the tag on his foot - you never get to see his face). You investigate him to get his profile, and then leave the morgue. Okay. Later when you come back... where's the body? Sure, we know the guy can resurrect, but still, damn.
Many times you would be in utter silence when the PA system would play its creepy tune before the Joker makes an announcement.
The regular tune was bad enough, but when the worn down version plays, it's even more unsettling.
Intensive Treatment, especially the visit after you get the zip wire device. After defeating the enemies in the large hall and disabling a bomb, the doorway to the area where, at the start of the game, Joker was wheeled into Arkham. However, things get really creepy from here on in. The screen glitches up and what follows is a return to the beginning of the game REVERSED, with Batman locked up and you playing as the joker. Then the camera switches to a first-person perspective from Batman as Joker shoots him. After that, it turns out to be another Scarecrow sequence, but with 3 copies of Batman, in cells, huddled on the floor, stumbling around and just sitting there. Then you discover one of them gnawing on a dead rat. Dear god...
That particular bit is even worse if you remember seeing the dead, bitten rat in the vents that was pointed out above.
One part of this sequence that particularly that's particularly disturbing was Batman screaming "CUT ME FREE!!!!!!!!!" Always calm, cool, and collected Batman screaming in terror?
The game can make you nervous even before you start playing it. When you first load the CD into the PS3, the game's download screen shows a series of shadowed images of characters, whilst a soundtrack plays. Only catch is that the soundtrack is made up of the echoing sounds of insane laughter.
If you have Detective Mode, you can see through the doors. At one point, you can see two bodies dangling in the air, kicking, struggling... until finally they go still. Open the door, and two dead guards are hanging from the ceiling execution-style. If you don't have Detective Mode on, you won't realize that you were a mere 30 seconds too late to save them with a well-aimed Batarang.
The single patient on the upper floor in the room where Clayface is located. He never gets out. You can't get to him. He's just... there. Panting and slobbering and generally being creepy.
Some of the chatter from the Blackgate prisoners can be this, such as the one guy talking about how Joker ordered him to kill his sister, which he did. Another guy mentioned that he was told the same thing, except that he has no sister, so he just got in his car and ran some random woman down in the street...
There's a Riddler trophy next to a spray-painted Joker smile. Not necessarily scary in and of itself, until you remember Riddler implying that he knows what Joker had planned...
Special mention to Batman's death by Smilex gas. He coughs and chokes for a while, while the escape prompt blinks at you repeatedly. Ignore this, and you're treated to an image of the Dark Knight slowly collapsing, his coughs devolving into him laughing insanely as he dies.
The Stinger. A crate of Titan floating in the river is grabbed by either Scarecrow, Croc or Bane. You've seen what it just did to Joker, now go change.
Early in the game when you break out of the facility you're in a big courtyard and can meet some guards and talk to them and learn a bit about them along with some medics by an ambulance near the entrance. A trip through the medical center later and they're all dead.
I'm surprised with all the classical moments mentioned here, nobody has bothered exclaiming a bit more about Zsasz! The very essence of Riddler's riddles later have you encountering in one of the many hidden hard to reach rooms (until Batman obtains an appropriate upgrade to reach it) in Arkham where it looks like a "normal" tea party taking place with the GCPD swat officer/guards sitting there. That riddle and room got this troper by surprise by how life like they sat by it looked very ominous like they were relaxed. It struck me that something obvious was afoot and doesn't seem right. I get a closer look and zoomed in and by my horror and surprise their necks had been slit and severed... To imagine what Zsasz was doing before hand with the victim's bodies got to me for a brief moment before I mustered the courage to continue on.
This turns out to be Zsasz' MO. In another room you see three guards, all dead, posed around as if they were playing poker. Zsasz, apart from tallying his kills, likes to pose his victims in life-like ways after he's killed them. That's incredibly creepy and that's one of the most normal, downplayed things this game has to offer in terms of scariness.
Keep an eye on Batman during the Scarecrow levels. Every so often, there'll be a flash of light, and he'll briefly turn into Scarecrow.