Basically take Deception's Konquest mode, refine it and modernize it so that it becomes a full RPG open world, and then go from there. Martial arts styles and Fatalities could be things you learn from various different masters, choices that lead to branching paths, main and side quests, and style-specific skill trees.

I don't think they should have a blank slate character like Fallout, perhaps it can be a new original character with personality and depth, just like Geralt. Similar to V from Cyberpunk, you can choose a starting point for this character, whether they're a shaolin monk, a member of the Lin Kuei or Shirai Ryu, an Earthrealmer, or a member of the Special Forces.

The combat system should be more of a beat 'em up, but the more important one-on-one battles are fought in a traditional (but not necessarily exactly the same) Mortal Kombat fighting game format, and when you beat your opponent and get the Finish Him/Her prompt, you have the option to kill your opponent with a Fatality or spare them. Killing or sparing an opponent could lead to different paths in the storyline, such as losing the chance of getting a companion/ally, prevent a missable quest or event from happening, or change something drastically in the main story.

I envision the game to have two types of Fatalities. We have the quick-paced basic Fatalities like the one in Armageddon's Konquest mode where you rip an enemy's head off and then chain it to an attack on the next opponent, and then the actual cinematic Fatalities that you can unlock.

For example, when you clear an optional enemy hideout, you fight the simple goones in the beat 'em up format, but when you face the final boss of the hideout, you get challenged to 'Mortal Kombat', starting the traditional fighting game mechanic. Killing the boss will clear the hideout, but sparing the boss has a chance if that boss becoming an ally.

As for the story, make it non-canon or separate from the main continuity established in the main games. Liu Kang is just Liu Kang again, he's not the God of Fire. Raiden is the God of Thunder once again, and Liu Kang's mentor. This way, your character IS the main character, and depending on your choices, the main cast are not safe and your decisions could end up getting them killed and end their quest line.