First off, even if you’re trying to mimic a Europe of centuries past, stop with the white people only. The human species has always been an explorer species, and people from all over have always, even before recorded history, been around people of other ethnic groups and cultures. With few exceptions. It’s hard to walk to an island like Japan, England or Ireland after the landbridges to them fell under the sea, so there are periods when some people are isolated by geography and oceans. OK, that’s acceptable.
But those times are brief. Boats are easy to make. Even ancient boats, the first kinds that civilizations would produce, can travel long sea cruises, much less to an island just across a strait or channel.
Then there’s the even braver and more skilled, such as the Pacific Islanders, who, in boat technology barely above a raft or canoe, inhabited all of Indonesia and Micronesia and Singapore and Tahiti and New Zealand, but also Midway and Hawaii and possibly even America.
So there’s no excuse not to have other ethnic groups represented in your fantasy world. And I don’t mean the token one or two. I mean neighborhoods full of them. Merchants and trades from all over. Slavers. Mercenaries that settled down. Prisoners of war that got released. Religious missionaries, explorers, refugees. People will always move from one spot to another and integrate cultures when possible. And there’s always people who will mate and marry exotic people that are not native to their area.
And then there’s Egypt. There’s a reason it used to be called the ‘Crossroads of the World’. Egypt had not only native Egyptians, but Nubians and Libyans, Arabians and Hebrews, Persians and Romans. Assyrians tried to conquer it, Babylonians had trade missions to it. There’s evidence of Africans from far south coming to Egypt and Celts living there.
It is completely uncalled for to have an only white people fantasy setting. Not even the dark ages of Europe had that.
Also, it’s a fantasy setting, make it fantastical. What prevents blue skinned humans from living in it? Green? Orange, purple? Or other?
Now, I wish I didn’t have to say this, I really do. But. I need to say it. Don’t be a racist. Don’t have racist characters. Do not make racist comments with your characters. Just don’t. It’s a fantasy world, derogatory terms made for our world would not make any sense in it. Further, what prevented your world from being integrated for long periods of time? Now, typically someone is going to say here, “The sole exception exists if the racist character evolves as a person and eventually does not become racist, coming to accept others.” But all too often, the racist character trying to be a better person is just a mouthpiece for the author and the ‘evolution’ is barely there, takes too long, and is never done right. All too often, a member of the ethnicity the character dislikes saves the character in question and the racist character accepts their savior as a fellow human being and friend. Not all of that savior’s ethnic group, just that one individual. So just do not do it.
Now, on species: try to be different and unique. Enjoy the fact you’re doing a fantasy world, if you’re using non-human peoples. Have a unique take on elfs and dwarfs. Make up some awesome species. In our world, there are magnitudes of order more insect species than all the fish, bird, reptile and mammal species put together. Have one or two intelligent insectoid species. One of the best stories written is from the ‘Hunter X Hunter’ manga, and adapted into an anime, about ‘Chimera Ants’. It is creepy, it is profound, it is exciting, and it is very philosophical. If you can read it, do so, if you can watch it, do so, but try to do at least one of them.
But regardless, no matter how unique they are, make your species believable. Not human. Not human-like. Believable. They could be alien, with a culture anathema to what humans know and understand, but so long as they’re believable and the reader can understand what they’re doing and why, you have a true winner.
And if you absolutely ‘must’ do a story that would be racist in an all human cast, shift it to speciesist. Have the character suffer from xenophobia and have them be a ‘racist’ against one of the fantasy species. Don’t use real world derogatory terms still, for it still wouldn’t make any sense (in fact, would make much less sense!), but it would be acceptable for a person to hate and discriminate against, say, Chimera Ants or Halflings, because we do not have any in our world. There’s none that would take offense to your story.
It’s probably not a wise idea, still. But at least it would be more acceptable. But whatever you do, do not, ever, make the all dark skinned version of a people an all evil culture. No more drow. No more “all dark elfs are evil” at all. Or dark dwarfs. Or whatever. Because only the dumbest or most racist of your readers do not know what you’re really doing. And it’s extremely offensive and has no place in literature. It was offensive when Gygax did it, and it still is, and it always will be.
In fact, it’s probably a good idea to never have an ‘all evil people’. That doesn’t exist in the real world, it’s not likely to exist even in a fantasy one. Cultures may be skewed towards evil, but are far more often just contradictory to the accepted social norms of others. Trolls, for example, may be considered ‘evil’ because in their culture, cannibalism of humans may be a great feast. Certainly, from a human perspective, eating humans is an evil act! And orcs may have a culture based around vengeance, trying to kill for even the smallest slight, but not every orc is going to believe in that. Further, culture is not species. Culture is the accepted communal beliefs of a society, and while certain people (be it orcs and trolls in a fantasy world, or Arabians and Russians in the real world) are very often born into one culture, in no way is a culture exclusive at all. Humans born into an ‘orc culture’ would act like orcs. Russian spies during the Cold War living in America who had a child born here would have their child raised in an American culture. But don’t even do that ‘this culture is all evil’ either, because moral absolutes do not exist and make the story and the world you set up into a farce.
Nothing is ever ‘all evil’. Just conflicting value systems.