Punch-Out!! features Little Mac, a young boxer fighting his way up through ranks of the World Video Boxing Association. After facing a series of colorful fictional opponents in three circuits and winning the championship in each, Little Mac enters a final "Dream Fight" against a highly skilled boxer. In the Gold Version, the final boss is Super Macho Man, who was also the final opponent in Super Punch-Out!!. Mike Tyson's Punch-Out!! features Mike Tyson, the real-life World Heavyweight Champion at the time. After the license to use Tyson expired, he was replaced by the fictional Mr. Dream.
Little Mac has a limited repertoire compared to most of his opponents. His punches are limited to left and right jabs, left and right body blows, and a powerful uppercut. The uppercut can only be used once the player earns a star, which is typically accomplished by counter-punching the opponent directly before or after certain attacks are launched. The player can acquire up to three stars, but loses them whenever Mac is hit or knocked down. To defend, Mac can dodge left or right, duck, and block punches by putting up his guard.
Little Mac has a heart counter, which decreases upon being hit, blocking a punch, or throwing a punch that the opponent dodges or blocks. When the counter decreases to zero, Little Mac temporarily turns different shades of pink and appears tired/exhausted, leaving the player unable to attack but still able to dodge, duck, and block. At this point, Mac can regain some hearts and his normal color palette only by avoiding the opponent's punches. He immediately loses all of his hearts upon being knocked down, but can regain some by getting up.
A bout can end by knockout (KO), if a fighter is unable to get up within ten seconds after being knocked down; by technical knockout (TKO), if a fighter is knocked down three times in one round; or by decision, if the bout lasts three full rounds without a clear winner. In order to win by decision, the player must accumulate a certain point total by punching the opponent. Some bouts cannot be won in this manner and will automatically result in a loss for the player if the opponent is not knocked out. Mac can only get up three times during any one bout; if he is knocked down a fourth time, he will be unable to rise and thus lose by knockout.
When Mac loses his first bout to a ranked opponent, he will have a chance to fight a rematch. However, if he loses a Title Bout, he will fall in the rankings – one place for the Minor or Major Circuits, two places for the World Circuit. Losing a rematch causes him to fall one place (unless he is already at the bottom of his circuit), forcing him to fight his way back up. A third loss, or a loss in the Dream Fight, ends the game.
Little Mac faces a total of 14 opponents: three in the Minor Circuit, four in the Major Circuit, six in the World Circuit, and Mike Tyson or Mr. Dream. All character sprites except King Hippo are reused for two characters each, with changes made to colors, head, or special moves. Mario has a cameo as the referee. Three opponents from the Minor and Major Circuits reappear in the World Circuit, with new attacks that force the player to devise a new strategy.