The research presented in this thesis concerns the contribution of virtual human (or avatar) fidelity to social interaction in virtual environments (VEs) and how sensory fusion can improve these interactions. VEs present new possibilities for mediated communication by placing people in a shared 3D context. However, there are technical constraints in creating photo realistic and behaviorally realistic avatars capable of mimicking a person's actions or intentions in real time. At the same time, previous research findings indicate that virtual humans can elicit social responses even with minimal cues, suggesting that full realism may not be essential for effective social interaction. This research explores the impact of avatar behavioral realism on people's experience of interacting with virtual humans by varying the interaction fidelity. This is accomplished through the creation of Cinemacraft, a technology-mediated immersive platform for collaborative human-computer interaction in a virtual 3D world and the incorporation of sensory fusion to improve the fidelity of interactions and realtime collaboration. It investigates interaction techniques within the context of a multiplayer sandbox voxel game engine and proposes how interaction qualities of the shared virtual 3D space can be used to further involve a user as well as simultaneously offer a stimulating experience. The primary hypothesis of the study is that embodied interactions result in a higher degree of presence and co-presence, and that sensory fusion can improve the quality of presence and co-presence. The argument is developed through research justification, followed by a user-study to demonstrate the qualitative results and quantitative metrics.This research comprises of an experiment involving 24 participants. Experiment tasks focus on distinct but interrelated questions as higher levels of interaction fidelity are introduced.The outcome of this research is the generation of an interactive and accessible sensory fusion platform capable of delivering compelling live collaborative performances and empathetic musical storytelling that uses low fidelity avatars to successfully sidestep the 'uncanny valley'. This research contributes to the field of immersive collaborative interaction by making transparent the methodology, instruments and code. Further, it is presented in non-technical terminology making it accessible for developers aspiring to use interactive 3D media to pro-mote further experimentation and conceptual discussions, as well as team members with less technological expertise.