Foreign Language Anxiety (FLA) is considered a central affective factor influencing English as a Foreign Language (EFL) learning. This study thus developed an online simulation game to create a virtually situated learning environment for reducing EFL primary school students' FLA levels and improving their English vocabulary learning. A total of 110 fifth graders from four classes participated in this study. Two classes were randomly assigned to the experimental group (N = 57) using the online simulation game, and the other two classes were the control group (N = 53) using onsite instruction. Each participant was then classified as a low, moderate, or high anxiety student based on the Foreign Language Classroom Anxiety Scale (FLCAS). This study found that, compared to the onsite instruction, the online simulation game more effectively assisted the low, moderate, and high anxiety students in reducing their FLA. Situated learning in the online simulation game made a connection between English vocabulary learning and the real world explicitly and visibly, which could further promote their English vocabulary learning. In particular, the moderate and high anxiety students' English vocabulary learning was significantly improved after the online simulation game. These results suggest that an online simulation game can create a situated learning environment that helps reduce EFL students' FLA and subsequently facilitate their English vocabulary learning.