The setting is like our world, only more so. Have you ever looked at something, and then put on a pair of sunglasses and looked again? You know how they can make something like a sunset seems more intense, brighter, more real than real? That's how we see the setting of this poem. It's not like you don't recognize the things you see, it's just that everything has been soaked in a weird and beautiful kind of magic. Things like trees that might ordinarily just stand there are suddenly almost alive; they dance and shiver. The river suddenly has a voice. It doesn't just burble along, it complains (line 120).
It's not like Tennyson just threw a few magic props into our world. There's something completely, mysteriously different about it. You imagine the sun would be brighter, the songs would be sweeter, and the knights would be taller and stronger. That magic mirror has a little bit of a "through-the-looking glass" feel to it already, and that's what we see everywhere around here: a world like ours, but a little distorted, richer and deeper and more fascinating.