When you start a game the difficulty level you see has a tool-tip saying what it does to the AI.  But I think it actually controls the monster strength too or instead.

Does anyone know for sure what it does?

Anyway you definitely control the AI difficulty by going into customize opponents screen.

If I am right then the tool-tip could maybe be changed to indicate that it controls monsters.  I'd like to see separate "world/monster" difficulty and "default AI" difficulty on the same screen (still with the ability to customize individual factions).

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Anyway, just ran a couple tests of difficulty combinations.  Both were large map with 10 factions including myself mostly hiding in my capitol building things but not moving.

1st test was maximum world difficulty and novice difficulty for all the factions.  6 of them died between season 42 and 64.  There were no other casualties before I gave up on season 259, but none of the surviving factions ever got close enough to introduce themselves.

2nd test was opposite.  Novice world and most-ferocious AIs.  Kraxis introduced themselves in turn 25, Altair in turn 28 and Pariden on turn 59.  Kraxis declared war on me in turn 53 and Pariden did on turn 59.  None of the AI factions had died when Pariden came and killed me on turn 63.

Fun to test but I'm not 100% what it proves.  Were the monsters really different or was the difference only from the AI difficulty set in the customize screen?