Problem with "Looping" IO in Haskell

Ideally, I would have a function called from main that calls itself until one player loses. But, this does not seem to work, since using any variables set in that function by user input results in type errors.

This is entirely possible. Next time please include some code so we can help you through your misunderstanding. here is an example code snippet:

import System.IO

To handle buffering issues.

main = do
    hSetBuffering stdin NoBuffering
    putStrLn "Gimma a name ye skervy dog!"
    name1 <- getLine
    putStrLn "Good, Good, now another, and make it snappy!"
    name2 <- getLine
    loop name1 name2 10

Notice main can call another function (loop) that lives in the IO monad. This other function is perfectly capable of getting and acting on user input, calling itself, and/or taking arguments.

loop :: String -> String -> Int -> IO ()
loop _ _ 0 = return ()
loop n1 n2 i = do
    putStrLn $ "Ok Mr. " ++ n1 ++ " and Mrs. " ++ n2 ++
               " tis time to roll the dice!"
    print i
    putStrLn "Options: (k)eep looping, (i)ncrement loop counter by 10"
    c <- getChar
    putStr "\n"
    case c of
        'k' -> loop n1 n2 (i-1)
        _   -> putStrLn "Blood and bloody ashes, we have to keep going?" >>
               loop n1 n2 (i+10)

And loop just does a simple-stupid job of asking for a binary input (increment the counter or not) and, well, loops.

If this doesn't help then perhaps you can post a bit more complete question and code. I'll edit with an updated answer.

Or you could use forever.

main = do
  x <- getLine
  foo
  forever $ do
     y <- getLine
     baz

If you're new to Haskell, I suggest you go through LYAH for a good introduction.