Both. It is especially evident in some of the caves (episode two or three I think) where you "step" down a series of stairs, but you eventually come full circle and end up back where you started. So how did you get back to where you started if you only ever went down stairs? Because you never actually left the horizontal plane that your whole game is played on. This was not an intentional design on the part of Blizzard since the maps in Diablo II are all randomly generated. This was just a side-effect of the random map generation.

As for the square tiles, Blizzard once again faked the isometric view with cleverly rendered 32x32 square tile graphics. Take the teleporters for example. If you slowly move the mouse over them, you can see the area where the teleporter lights up is actually composed of square tiles. The "3D" view that you could enable simply used the 3D card to render the tiles slightly skewed towards the top centre of the screen. It was still a 2D game, but with skewed tiles.