The world (loka) here refers to the world or reality that one is in, a mentally-generated reality. The term papanca (reification or objectification-classification) is used to describe the generation of the mental reality.
Everything is objectified and classified as either self or non-self, and there will be created an association between non-self objects and the self (also see this question for sutta quotes). For example, once you have tasted the pleasant taste of milk, you like it, know it as "milk" and think about it when it's not there. Milk is therefore classified as a "tasty drink" and "I like milk because it is tasty".
You also identify people and animals, as well as classify them, for e.g. this is my mother, that is not my mother. This is a cat and it's not dangerous to me, while that's a snake and that's dangerous to me.
The Sabba Sutta or the discourse on The All states:
The Blessed One said, "What is the All? Simply the eye & forms, ear &
sounds, nose & aromas, tongue & flavors, body & tactile sensations,
intellect & ideas. This, monks, is called the All.
So, the mentally-generated world is based on eye & forms, ear & sounds, nose & aromas, tongue & flavors, body & tactile sensations, intellect & ideas.
The five aggregates are form, sensations, perception, mental formations and consciousness. If you cling to them, that is, have an association to them with the self, then they are called clinging aggregates.
Basically, the mentally-generated world is the same as these clinging aggregates, because it's formed in the mind, and it's based on six senses and their inputs, and also the mental idea of the duality of self and non-self, as well as the association with the self (clinging). It's also a mental formation (sankhara), isn't it?
An arahat does not cling any more, so he does not have the clinging aggregates anymore - only aggregates. He does not have a sense of self. He also does not have papanca, and also does not have a mentally-generated world. He sees things as they truly are, and not as how it is objectified and classified relative to the self. This is apparently also known as tathata.
From MN 1:
“Bhikkhus, a bhikkhu who is an arahant with taints destroyed, who has
lived the holy life, done what had to be done, laid down the burden,
reached his own goal, destroyed the fetters of being, and is
completely liberated through final knowledge, he too directly knows
earth as earth. Having directly known earth as earth, he does not
conceive himself as earth, he does not conceive himself in earth, he
does not conceive himself apart from earth, he does not conceive earth
to be ‘mine,’ he does not delight in earth. Why is that? Because he
has fully understood it, I say.
From Sutta Nipata 4.14:
"Seeing in what way is a monk unbound, clinging to nothing in the
"He should put an entire stop to the root of
'I am the thinker.'
The perception, "I am the thinker" lies at
the root of these classifications in that it reads into the immediate
present a set of distinctions — I/not-I; being/not-being;
thinker/thought; identity/non-identity — that then can proliferate
into mental and physical conflict. The conceit inherent in this
perception thus forms a fetter on the mind. To become unbound, one
must learn to examine these distinctions — which we all take for
granted — to see that they are simply assumptions that are not
inherent in experience, and that we would be better off to be able to
From Bahiya Sutta (Udana 1.10):
"Then, Bāhiya, you should train yourself thus: In reference to the
seen, there will be only the seen. In reference to the heard, only the
heard. In reference to the sensed, only the sensed. In reference to
the cognized, only the cognized. That is how you should train
yourself. When for you there will be only the seen in reference to the
seen, only the heard in reference to the heard, only the sensed in
reference to the sensed, only the cognized in reference to the
cognized, then, Bāhiya, there is no you in connection with that. When
there is no you in connection with that, there is no you there. When
there is no you there, you are neither here nor yonder nor between the
two. This, just this, is the end of stress."