Daxter takes place during the two years he searches for Jak, whose imprisonment was shown at the beginning of Jak II. On his own in Haven City, Daxter takes on a job as a pest exterminator to collect clues that will lead him to Jak, but he soon discovers more excitement than he bargained for.

Daxter's feral-like moves provide him with the ability to crawl on all fours, climb walls, creep up on enemies and maneuver through small places. Daxter also possesses unique weapons to help him out, including an electric swatter and bug spray gun, which enable him to crush and blast metal bugs or hover through challenging levels. Another imaginative gameplay mechanic allows players to join Daxter inside dreams levels where he takes the star role and acts out his fantasies of being a full-fledged action hero.

In addition to numerous hours of action, Daxter supports a two-player "Rock Paper Scissors" inspired "Bug Combat" mini-game. Players will be encouraged to collect in-game items to customize their bugs and pit them against others wirelessly via Ad Hoc mode on the PSP system. Daxter also features interoperability between the PSP system and the PlayStation(R)2 computer entertainment system by connecting with Jak X: Combat Racing(TM) to unlock secret characters, vehicles and more.