A long time ago I started work on a homebrew setting I quickly abandoned through apathy, but I was using a form of evolution in that world to account for the major races.
Essentially, back in the uncertain mists of prehistoric time, there were three races: dwarves, orcs, and aquilae. Back then the world was less distinctly formed, and so as they spread out across the world they found themselves adapting to their environments in the course of a few dozen generations rather than a few thousand as it might be in the present.
Dwarves grew shorter and sturdier, the better to labour at the task of carving a home for themselves in the great mountain ranges. Orcs grew tough and cunning, the better to stalk and catch their prey in their thickly-wooded homelands. Aquilae went halfway - they changed their environment to meet them as much as they changed to meet it, and established great cities in the midst of nature, as much grown from the land as built upon it.
The aquilae were a conservative race, however, and as their kingdoms became an empire and the empire grew, it became decadent. Their leaders resisted change for the sake of resisting change, and in frustration nearly a third of the population abandoned the forested cities for the relatively uninhabited plains and grasslands.
These rebels were led by the brightest and most dynamic of the aquilae, and the hard struggle to survive in such an unfamiliar environment brought their inventiveness to the core. At the same time, their severing of the aquilae's bond with the natural rhythm around them caused a dissonance which shortened their previously long lifespans. Today these plains-dwelling, inventive people are called humans.
The majority of the aquilae were left behind, but with the most energetic and driven of their people gone to the plains, their population and civilisation dwindled. Eventually they could no longer maintain the great cities of their civilisation and retreated to a simpler existence in the deepest forests. Only the efforts of sentimental and persistent human traders kept up the links between these aquilae, now known as elves, and their own growing nations.
(The elves of this setting were going to be more like wood elves than the high elves of standard D&D.)
Today, elves and humans can interbreed still, but half-elves are more likely to be found amongst the river-plying trading houses of the human nations than among the more settled peoples of the plains themselves or the elves of the forests.
The orcs, as may be expected, did not take well to the elven intrusions into the dark heart of the forest they called home. Their scattered and infighting tribes had neither the wisdom to unify nor the civilisation to resist even the decadent elves' knowledge and magic, and were driven out of forests they'd occupied since the dawn of creation.
Some cowardly orcish tribes fled from the advancing elves and into shallow caves in hillsides and the surface of the earth, diminishing in stature both from evolutionary pressure and the disapproval of their deities. Goblins now, they stayed in contact with their orcish cousins over the subsequent centuries and so can still produce crossbreeds, called hobgoblins. These creatures tend to find their niche as war-leaders and bodyguards to more cunning and intelligent goblin chieftains.
Some hardy tribes managed to survive by migrating to barren mountain ranges even shunned by the dwarves as inhospitable, and grew tall and strong in their isolation, conquering their harsh environment and eventually becoming ogres. Withdrawn from most of the world, they can no longer produce crossbreeds with their distant orcish kin.
Another group of orcs fled to the plains, where they staked out nomadic ranges and eventually evolved into gnolls. Competing with the flourishing human nations, they have a fierce warrior society with strict codes of behaviour, if not quite honour. Infrequent contacts with their orcish cousins produce crossbreeds called "flinds", despised as brutish and uncontrollable and useful only as shock-troop cannon fodder for raids on human settlements.
Orcs still remain, though in a more brutish and, if possible, even less sophisticated form than their progenitors. Life in the most distant swamps and forest reaches where the elves drove them has made orcs tougher and more barbaric but robbed them of much of the cunning that now lives on in their goblin cousins. On the rare occasions when a hobgoblin or flind is brought up in an orcish tribe, they are treated as scum generally below the social status of unproven children, so very few choose to remain in such an environment.
Dwarves make their homes in high mountain ranges, but do not delve too deeply into them. Their agricultural needs - dwarves rely on surface farms on in high river valleys for their crops - require them to carve their cities closer to the surface than one might expect, but their skills in stonework are still superlative.
Long ago, while the aquilae were building the first fragile semblance of an empire in the forests, some dwarves delved deeper into the rock of the earth than could be sustained by their normal lifestyle. Instead, these incurably curious and hardy folk took up a semi-nomadic lifestyle as they explored the caves and rifts deep in the earth, establishing trade routes between dwarven cities as a way of supporting themselves. Their strange lifestyle eventually produced a cultural rift between the nomads and their dwarven kin, and they became a separate race, the gnomes, who to this day wander the deep caverns of the world and sustain themselves by acting as trade caravans between dwarven cities and even to the human nations.
Naturally, the gnomes came into conflict with the subterranean goblins, but what is not known by many is that a deeper race exists, magically created by perverting the physical forms and shattering the minds of an entire gnomish clan - kobolds. No one today, even those few who know of their existence, can say how they came to be - though most speculate they are the results of a curse laid by an evil wizard, god, or demon.
