World Creation My Way

The Evolution of a Fantasy World
In the Lamentations of the Flame Princess Deluxe Edition booklet titled "Recommended Reading", James Edward Raggi IV talks about the work of several authors of inspiration for gamers including J.R.R. Tolkien and the tendency for role-playing world-builders to front-load an immense amount of detailed information into their world in an effort to create something as rich and amazing as Tolkien's Middle Earth. Mr. Raggi clearly states, "A richly detailed world with an extensive history is the result of a long campaign, not its beginning."
My own game world is a mash-up of ideas taken from several literary sources, a number of my favorite play-aids and nearly 40 years of game-play. It has evolved and taken shape slowly over decades and I can not imagine trying to create it from whole cloth at one setting before any play begins. Part of this is my preferred referee style which relies heavily upon improvisation. I like to referee from a few pages of notes and a map, most of the detail emerges as a part of play and is the outcome of player actions and all the preconceived ideas I have about the setting. The notes are often just enough to remind me of thoughts I was having about the location, setting, etc. when I was doing my preparation work. The note is frequently a reference to the source from which I got my original inspiration, a scene in a novel, or a description from a pay-aid, or a location I have visited and a bit of imagination applied, turned into a place of mystery.
Allowing for world creation at the table requires good referee notes be taken during the game or immediately after in order to record what is collectively discovered about the world. Memory is imperfect and too many times I have forgotten the name of a village, or an important NPC (or deity) because I didn't write it down at the time. Consistency is encouraged and certainly helps with verisimilitude.
As I recall in my beginning there wasn't even a map, just an idea about the type of stories I wanted to referee. Heavily influenced by the implied setting of White Box, R.E. Howard's Hyborian Age and J.R.R. Tolkien's Middle Earth, I sought to referee my games in a mature, slightly dark setting with an ancient feel. I borrow details that evoke some shared image in my players imagination so as to have some control over how my world is perceived. I make comparisons to things from our shared environment, movies we have all seen, comics we have all read, etc. As play continued, the stories of our adventures would become part of the legend. Places acquired names and eventually maps became larger and more detailed. The World was developing character. My favorite play-aids were adopted pretty much as written and also helped shape the world. 
The first maps were hand drawn during a play session to illustrate relative positioning of known landmarks. As adventures occurred they found their way onto the map, which expanded as needed for play. Many years passed with the known world being a relatively small area. The advantage to this is the far reaches can contain almost anything. Rumors of what lies beyond often leads the adventurers to explore new areas which then are mapped and become permanent features. Other areas have remained mere rumors. Eventually I happened upon an area of planet Earth which closely resembles my fictional play map and I now have a "real" geographic reference for what lies beyond. Whether players ever figure out where this is is a story yet to be told.
Early on I started calling the world Dreadmoor, because I like the way it suggests a sinister and dangerous place. Other place names often have a somewhat "familiar" sound because I like to leverage existing ideas in the player's mind to convey a somewhat common, shared understanding of the world. Names that are an exotic string of vowels and consonants are rarely used and imply something truly alien. During nearly four decades of play, I have avoided defining any "official" list of deities. PCs may worship any deity/demon or devil they wish. As referee, I go to some pains to avoid explaining how magic, divine or mundane, works. It just does...players are therefore free to extrapolate and imagine. I find it highly entertaining to listen to them explain to each other how they think it all works, what gods are "real" and "false". It quickly becomes part of the role-play.
In the White Box the author's suggest a copy of the boardgame Outdoor Survival be used for a wilderness map allowing players to roam about having adventures. Taking the idea as a start, adding a city for urban adventure and a sea for nautical adventure and developing a sense of "character" for the place is world building. The rest can be done through the natural evolution of play.