Tolkien's mythological tales of Middle-earth are meant to be taken, fictitiously, as an ancient history of the Earth, particularly of Europe, from several thousand years before the lands took their present shape. In fact, three of the works claim to be the life work of Bilbo Baggins. Like Shakespeare's King Lear, they occupy a historical period that could not have actually existed.
The term "Middle-earth" was not invented by Tolkien; it occurs many times in Middle English (Middel-erde) and Old English writings (Middangeard). It occurs half a dozen times in Beowulf, and is cognate to Midgard in Old Norse. It is consistently misspelled as 'Middle Earth' by journalists.
Although 'Middle-earth' strictly refers to a specific continent on Tolkien's fictional ancient earth, representing what we know as Eurasia and Africa, the term is sometimes erroneously used to refer to this entire 'earth' (properly called Arda).
A note on "truth" and canon
It is remarkably difficult to speak of what is true in the context of Middle-earth, perhaps more so than for any other fictional world, such as Greek mythology. The reasons for this are three:
The works of Tolkien have been a major influence on role-playing games along with others such as Robert E. Howard, Fritz Leiber, H.P. Lovecraft and Michael Moorcock. Although the most famous game to be inspired partially by the setting was Dungeons & Dragons, there have been two specifically Middle-earth based and licensed games. These are the Lord of the Rings Roleplaying Game from Decipher Inc and the Middle Earth Role Play game (MERP) from Iron Crown Enterprises.
The computer game Angband is a free roguelike D&D-style game that features many characters from Tolkien's works.
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