The Worldstone resides deep within Mount Arreat. It was brought into being in order to keep Sanctuary hidden from the forces of Heaven and Hell.
History
The Worldstone was created along with Sanctuary by the Archangel Inarius with the help of other Angels and Demons. After the creation of Sanctuary's first inhabitants, the Nephalem, the Worldstone was used by Inarius to weaken them. So powerful was this curse upon the first humans that each successive generation became weaker, as well. The Worldstone was kept in the great mountain of Mount Arreat, and the brave Barbarian tribes of Sanctuary agreed to guard it with their lives.
Soulstones are thought to be fragments of the Worldstone, but this speculation has yet to be proven or disproved with any certainty. Although it is known that Tyrael gave the soulstones to the Horadrim, not even Horadric lore is able to recite their true origin.
Destruction of the Worldstone
The Worldstone was destroyed by Tyrael after the ultimate battle between Baal and the Heroes of Light. Baal had corrupted the Worldstone to his will, and it was decided by Tyrael that it had to be destroyed, lest the forces of Hell come flooding into the realm of Sanctuary. It is speculated that the next game in the series, Diablo III, will explain the effects, if any, on Tyrael and Sanctuary for his drastic action.
Adding to the mystery of Tyrael's action is the concern and uncertainty of the inhabitants of Harrogath after the destruction of the Worldstone. It is known in the Prophecy that the Worldstone would be corrupted, but Anya goes as far as mentioning that the Prophecy never mentioned it being outright destroyed.