Here we go again. Okay, these are
market terms. They break down like this:
Genre fantasy: Fantasy works that are published by genre fantasy publishers expressly for the genre fan audience. What is a genre fantasy work? Fiction containing fantastic magical or supernatural elements for which there is no science/reality-based explanation. This is also the definition of non-genre fantasy published by non-genre publishers.
Market sub-genres of genre fantasy:
Epic fantasy
Urban/contemporary fantasy
Comic fantasy
Dark fantasy
Alternative dimension fantasy (for want of a better name)
Epic fantasy -- traditional, classical fantasy, originally called high fantasy or sword and sorcery fantasy. Epic in scope, high stakes plots, often involving VIP's (kings) and war conflicts, often with large casts. But the number one defining characteristic of the epic fantasy sub-genre is that it be a pre-industrial setting, whether it be a historical Earth setting or an imaginary realm setting. Essentially, if the setting is similar to Earth culture in the 1800's or later or in an imagined future time, it's not usually considered epic fantasy. If the setting is similar to Earth's ancient, medieval, Renaissance or Englightment periods of history, it's epic fantasy. Tolkein, Jordan, Brooks, Goodkind, Feist, Hobb, Cherryh, Martin, et al. are epic fantasy writers. Gary is an epic fantasy writer. In fact, Gary is possibly the definition of epic fantasy writer.

Epic fantasy does not have to have dwarves, elves or dragons, though these are commonly used in the sub-genre.
Urban/contemporary fantasy -- they could never come up with a good name for this one; initially it was a catch-all category. In the eighties, it started being called urban fantasy, even though much of it wasn't urban in nature, to tie it in with the excitement over cyberpunk sf. But writers hate that name, so contemporary fantasy became more used. It is fantasy stories set in a post-industrial setting -- 1800's on up into the future. So Barbara Hambly's "They Hunt the Night" about vampires in late 1800's England, is considered "urban" fantasy, not epic fantasy. Neil Gaiman's "American Gods" and "Neverwhere" which take place in the current day are considered urban or contemporary fantasy. Urban/contemporary fantasy may have elves, dwarves, pixies, dragons and whatnot, or not, as it please you.
Comic fantasy -- fantasy focused on being satirical or humorous. Terry Pratchett and his Discworld novels is the leader in this sub-genre.
Dark fantasy -- Essentially, most horror, that which contains fantasy elements, is a sub-genre of dark fantasy, but horror is usually considered a separate market category of stories intended to scare and horrify. Dark fantasy stories are intended to spook and titillate. They are ominous, noir and Gothic in atmosphere, focus and tone, and sometimes gross and bloody. Tanith Lee is one of the most well known dark fantasy writers. Technically, China Mieville is a dark fantasy writer, though it could be argued he is an urban/contemporary fantasy writer. (More on that below.)
Alternative dimension fantasy -- There is a group of novels that are not comic or dark but don't quite fit in the pre-industrial/post-industrial division either. These are alternative dimension fantasies in which a person from the modern world slips into an epic fantasy realm. They've never really been given a formal name or separate sub-genre. Instead, they are usually thrown in with comic fantasy, if they are comic, which many of them are, or epic fantasy, or occasionally contemporary fantasy. Donaldson's Thomas Covenent series for instance, which is one of these, is put in the epic fantasy category usually. I mention the group here just to avoid confusion.
Recently, writers and fans have been mobolizing to create a new sub-genre, or rather gather titles from dark fantasy and urban fantasy into a new category. It has been given the unfortunate name of the New Weird, though other names have been floating around. It is essentially dark fantasy with industrial or futuristic elements, like Mieville, and urban fantasy with a noir touch, like possibly Gaiman or Laurell K. Hamilton. Whether the New Weird will become an established official market sub-genre is uncertain, but publishers have started to use the term, and that is how chick lit got started. Plus urban fantasy could really use a new name, but it is doubtful contemporary fantasy writers who don't write noir will really fit into a New Weird category. So there may end up being even more new terms.
But basically, you can set a fantasy in the modern world, or even a futuristic world, you can have elves and dragons or leave them out, and it can be epic in scope or very small, and other writers have already done it before you. And there are already loosely enclosed categories for you to be slotted into.
