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Arena never considers walls next to the player or next to light sources as being fully lit. This means that a dither is always applied except in daylight outdoors. Due to the low resolution of the game, this results in a muddy look, especially on modern screens.
I was able to tighten and push back the shadows. Now when you're in low-light conditions, like in a dungeon or someplace outside during a foggy day, nearby textures will appear clean. See the before and after pics for comparison.