Nephalems are the children of the angel and demon who created the sanctuary. Basically they are the humans in the Sanctuary. Also Nephalems are very powerful becasue they were birthed from and Angel and a Demon.

"*The Sanctuary was created by an Angel (Inarius) and his demon lover. The humans that inhabit it are basically their children (also known as Nephalem).* In terms of powers, the worlds are controlled by basically a council of Angels and a council of Demons. Personally, I would assume that Heaven and Hell work much like the world does today. There is a specific being that rules that domain (presidents, dictators, queens) and there are several domains(countries). Each is ruled separately by their own methods. One can also argue that there is a God in our real world, but that is a completely different can of worms. As for Diablo, no God is ever mentioned in the lore.

Any "God" figures that happen to be worshipped by the Nephalem (or humans) are assumed to be real people who did exist but didn't necessarily have godlike powers.

Also for a little side-lore which can be gathered by reading Diablo literature or also this site: The Sanctuary was created as a place where Angels and Demons could live in harmony and escape all of the constant fighting. It was intended to be just that: A Sanctuary. Unfortunately Diablo had other plans for the world. The Worldstone was the entity that was used to hide The Sanctuary from Heaven and Hell. " - Taken from [here][1].


  [1]: http://gaming.stackexchange.com/questions/67282/is-there-a-god