This paper presents an algorithm for creating and maintaining a dynamic localized peer-to-peer overlay network with its main application to massively multiplayer games. In these games, players reside in a large game world with many thousands of players but each player has typically a limited vision range. In our solution, players join the network as peers and mainly connect to neighbor peers that are close to them in the virtual game world. As players move in the game they change their neighbors dynamically with very little overhead. Peers can multicast messages that are received by peers in their locality very fast (often faster than in client-server solutions) while players that are further away receive them later or not at all. Not receiving messages from remote players is important in order to not cause the load on each peer to grow with the number of players in the game. Our performance analysis confirms that our solution allows for dynamic game worlds of practically unlimited size, only limited in scale by the number of players within the vision range.