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Here is an attempt at covering PC races for Mystara from a newbie point of view. There is certainly plenty to do to clean this up and remove implied knowledge about the setting, though. Finally, there is no claim of or attempt at being precise with respect to the full setting -- rather than discuss elements of the setting that are only relevant beyond the Known World (or beyond newbie level knowledge), I'm purposefully being vague (e.g., most Dwarves are Rockborn, but I'm not saying what other dwarf subraces there are).

PC Races for Mystara from a Newbie Point of View

by Giampaolo Agosta

Most humans, regardless of their origin, are similar in traits and abilities to baseline humans of other worlds.
Mystaran humans have a lifespan similar to that of real world humans.

There are several Elven races in the Known World. The two primary races are Sylvan Elves and Shadow Elves. A third race, Water Elves, is present in the Minrothad Guilds. Most Mystaran Elves are adept at both casting wizardly magic and fighting with bows and swords. Contrary to most other races, Elves are able to cast wizardly magic while in armour of any type.
Sylvan Elves are generally similar to baseline Elves of other worlds.
Shadow Elves are a secretive, subterranean race. They are strictly henotheist, and often combine wizardly and divine magic. Official rules for player character Shadow Elves exist under the Classic and Advanced (2nd edition) D&D rules set.
Mystaran Elves have a lifespan of about 800 years.

Half-Elves: Mystaran Elves and Humans are cross-fertile, though the hybrid don't breed true, and, contrary to other worlds, Elves may have human ancestors. Basically, an individual is classified according to the race he resemble most closely, or takes on a unique mix of attributes and abilities, depending on the rules set used.

Most Mystaran Dwarves are native of Rockhome, a nation in the Known World area. These Dwarves, more properly known as Rockborn Dwarves, are similar to the baseline Dwarves of other worlds (though female dwarves have no facial hair, contrary to some other worlds). Rockborn Dwarves are highly magic-resistant, and incapable of using any form of wizardly magic, and have a strong dislike of it. They can use clerical magic with some difficulty, though they generally keep this a secret.
Mystaran Dwarves have a lifespan of about 200 to 270 years.

Mystaran Halflings are known as Hin. There is a single Hin race, though cultural differences between Hin nations may be significant. Mystaran halflings have pointy ears and furry feet, but are not especially plump or child-like in appearance. Older halflings sometimes sport full beards. Like Dwarves, halflings have minimal aptitude for magic (of all types), and are totally unable to wield wizardly magic. Experienced halflings sometimes study a type of druidic magic, though.
Mystaran Halflings otherwise have abilities similar to those of standard Halflings.

Gnomes are uncommon in the Known World, compared to other demihumans. Rock Gnomes are the primary subrace. They have a strong interest for technology, and physically resemble Dwarves, though Gnomes are of lighter build and sport longer, bulbous noses. Contrary to Dwarves, Gnomes have a moderate talent for spellcasting of all kinds.

Mystaran Gnomes and Dwarves are cross-fertile. The same considerations given for Half-Elves apply to Gnome-Dwarf crossbreeds.

Other Player Character races
There are many other playable races in Mystara.

In the Known World region, all Goblinoid species (Orcs, Goblins, Ogres, Hobgoblins, Bugbears, Gnolls, Kobolds and Trolls) are playable, though these characters are best used within the context of a Broken Lands campaign. Note that all Goblinoids are related, and descend from a single ancient race. Gnolls are the result of ancient magical tampering and crossbreeding, while the other races evolved naturally.
All Goblinoid races are cross-fertile with each other, and with humans. See "Half-Elves" under the Elf entry for a discussion of crossbreeds in Mystara. The Classic D&D rules set has a generation system for Goblinoid crossbreed PCs.
Most Goblinoids are warriors, though stealth is also appreciated, and primitive magical traditions, both wizardly (wokani) and clerical (shamans), exist among these races.

Lupins and Rakasta are two popular races of humanoid canines and felines, respectively. Lupins are the most common non-human, non-demihuman player race in the Known World region (they may be actually more widespread than Gnomes), but Rakasta are also present in Glantri and Ochalea. Rules exist for PC Lupins and Rakasta under the Classic and Advanced (2nd edition) D&D rules set.
Both Lupins and Rakasta are almost as versatile as humans when it comes to professional inclinations. There are many breeds of Lupins and Rakasta (which may be as different as real world dog breeds or feline species); the Advanced D&D rules set (second edition) has specialised racial packages for each breed.

Player Character races from D&D 3e and 4e
This paragraph covers the possibility of introducing core races from editions of D&D that do not support Mystara.

Half-Orcs: there are many crossbreeds between Goblinoids and Humans. Half-Orcs are a possible outcome (though by no means the only one)

Half-Elves: an individual can have an arbitrary mix of Elven and Human ancestors, and may therefore be classified as Elf or Human if he heavily favours one side. Truly balanced individuals might be represented by the Half-Elf racial package.

Tieflings are best considered as planar visitors, though their statistics could be applied to various "alien" human subraces (usually outside the Known World).

Dragonborn are best considered as visitors from distant regions. They might call themselves Krolli or Sis'thik (a wingless breed).

Eladrin do not match any of the Elven subraces of Mystara. However, they can be used to represent the most common type of Fey, the Sidhe.