In the distant past, when the gods and daedra lords were planning their war against the titans, they needed a place where they could meet in secret, away from the watchful eye of their more powerful siblings. Yajiit and Oblineth, the sisters of fire and ice, used their powers in tandem to create a small refuge on the northernmost peninsula of Galendor, a place where the freezing temperatures of the high Arctic were held at bay. Here the gods and daedra constructed a great auditorium where they could come to discuss matters that affected both groups. All of them signed a magical pact that would prohibit anyone from acting in violence within the realm that Yajiit and Oblineth had created. Akkala dubbed the place Sanctuary, and the name stuck.
Today, Sanctuary remains a neutral ground where any of the gods and daedra lords (or any of their descendants) can meet and parley with one another. It covers an area of approximately four square miles, and in the years since the gods and daedra signed their original pact they have constructed many other facilities where they and their followers can relax in comfort during extended negotiations. Most of these facilities would also be quite comfortable for mortal beings, though some (such as the lava baths enjoyed by the balrogs) are obviously lethal.
Sanctuary has no walls, other than the walls of magic that hold off the eternal Arctic winter. Any mortal who can brave the journey through the Giantdowns and make his way to the city will be welcomed as a guest, though he is not likely to be granted an audience with the gods or daedra lords themselves unless he has very good reason. In practice, though, Sanctuary receives very few visitors, because the entire peninsula is shielded from magical scrying; most people, even most scholars, have no idea that it exists, and even the Lothanasi don't know its exact location.1
Sanctuary is administered by three daughters of Nocturna who are avowed neutrals in the war between the Heavens and Hells. They oversee the maintenance of the facilities and keep track of the schedule of events at the auditorium, ensuring that two secret meetings do not accidentally occur at the same time (which could obviously affect the secrecy of the participants). The scheduling books are magically sealed so that no one except the administrators, not even Kammoloth or Ba'al, can examine their contents.
In recent centuries there have been few formal negotiations between the gods and the daedra lords; tensions have been escalating, and both sides believe that an open war is coming. In this environment Sanctuary has been used more often for scheming within the respective camps of the gods and daedra lords rather than between them. One example of this occurred in ~200 CR, when avowed rivals Lilith and Suspira met and formed a (very temporary) alliance against Revonos to remove his disciples from the throne of Lom Shi'Un.2
Another purpose for which Sanctuary has been used since its inception is for illicit romantic liaisons between members of the Pantheon (and their servants). Despite the ongoing war, many individuals on both sides remain attracted to individuals on the other side of the fence, and Sanctuary has numerous quiet, comfortable suites where these affairs can take place in privacy. The administrators keep their silence about these meetings, just as they do about everything else that happens in Sanctuary, and they do not spy on their guests when they are behind closed doors; as a result, no one but the participants is ever quite certain whether a given meeting is an informal parley or a secret tryst.