Tolkien's original intent was to write a mythology for his native land of England, as its ancestral myths had been lost with the numerous invasions throughout the Dark Ages. He therefore set out to make it himself, writing the Book of Lost Tales from the point of view of Aelfwine, a man from Anglia, who found himself in the isle across the western sea (many celtic myths contain the image of the magical fairy land across the western ocean, also many tribes of early men migrated west until they reached the ocean.) There he learned from the Gnomes and the Fairies the 'true' history of the world: the creation, the coming of the gods, the shaping of the world, the children of illuvatar, the wars of Artanor, and the prophecy of the Last Battle and the rekindling of the Magic Sun. Then, Aelfwine (called Eriol by the elves of the island) would eventually drink of the draught of magic Limpe to make him like an elf. Then Ingil the king of the Island began the Faring Forth, where the Hosts of Elves and Gnomes on Tol Eressea went forth to Middle Earth to save their lost kindred, and to vanquish the secret hosts of Melko, bringing an end to the sufferings of the world. However, the march was unsuccessful, and the island they had been ferried on was left anchored in the northern waters, becoming England (ireland was formed when they tried to return and a bit broke off) Thus the elves dwell in England more than any place else, and there men still retain their friendship with the elder race.
Now, after he started to revise the mythos, he left off telling the bits that connected it to real life, but still maintained the framework of Aelfwine the mariner. This framework persisted far into the later stages of his writing, i think even until or even after the time of lotr. The hobbit was written as a seperate story originally, but merged into the ME mythos. LotR was written to be a more fantasy story, written as an actual firsthand account of events, not merely as an analistic recording of psuedo-history. Thus, this framework for his mythology was not felt as keenly in the work.
In his final years, Tolkien inserted himself into the mythos, claiming to be a translator who has found the Red Book of Westmarch written in Westron, and had painstakingly translated it into English. Thus, it can be surmised that tolkien always intended ME to be our own world, but still in a mythological context, and an increasingly tenuous one as the mythos evolved.