Before you go throwing around something being "bugged" verify that monitor and/or video card scaling are disabled.
Arena is a 320x200 game. Do you expect a 2x scaler to scale it to 640x480?

Assuming you're using a LCD why do you insist on using the original resolution anyway when it's suboptimal to do so?

Fullresolution=original is intended for CRT displays, typically not for usage with scalers except if you want to.

Indeed, that makes sense.
Thank you for correcting me.

So you have similiar borders?
Can you add screenshot of Arena, or other old DOS game, please?

In DOSBox condig file for Arena I have set:
"fullresolution=0x0"
"windowresolution=original"
"output=DDraw"
"aspect=true"
"scaler=hq3x"
In NVIDIA control panel i have set:
Apect ratio scaling mode
Scaling performing on GPU
Overriding the scaling mode set by games and programs is checked.

Are these settings okay?

Is there ability to use hq4x or even bigger scaler in DOSBox? It would be maybe better.

If you get one of the special DOSBox builds which support output=direct3d with pixelshaders, you can use an hq2x pixel shader and set the resolution to anything you want. The hq2x, regardless of "2x", will be used to scale to your desired resolution. Scaler=none should be used in that case. Of course if you scale it up that much it doesn't necessarily look great, here's an example: https://imgur.com/a/o4MQ0A1. So typically if I use hq2x.fx filter I set the fullresolution to 1024x768.

Similar for builds supporting openglhq, but I find direct3d with hq2x pixelshader to be much more stable.

I've been using SVN build from this page: http://ykhwong.x-y.net/, specifically http://ykhwong.x-y.net/downloads/dosbox/_win_/20140125.7z (tried one of the newer ones and it was more buggy, but haven't tried the newest one)

BTW where is the free ES Arena download? I can't find it on GOG, and bethesda's site doesn't seem to have a download link for it either though maybe I need to register to see it?

It seems Bethesda deleted the link for the Arena on their site (and link for Daggerfall, Redguard Comic, Morrowind addons too). The Arena that was here on their site was floppy disk version (without voice).

And here on GOG you get it when you buy Bethesda game. It is CD version (with voice).

You can find somewhere download for floppy or CD version.

If are you not going to buy some game from Bethesda here on GOG, and you want CD version, find "ArenaSetup".

I'm not a fan of most unofficial builds and I really hate to recommend them but if for some reason you think you need more scalers then you can try this one that includes 4,5,6x scalers and the pixel-perfect patch:
https://blog.yesterplay80.net/dosbox-ece-en/

Official DOSBox doesn't integrate lots of patches since it has to support more than Windows, has to maintain guest compatibility, has to worry about maintaining tons of patches that no one actually uses, etc etc. So it's not just a matter of applying a patch and calling it a day. Also the priority for DOSBox has only ever been about game compatibility not flashy or unused features, if the devs had to worry about keeping DOSBox alive because of $ I'm sure you'd see alot of crap thrown in.

Arena download : http://en.uesp.net/wiki/ArenaFiles (add a colon between Arena and Files, i removed it because the forum screws the url otherwise : Arena:Files)

Thanks! This is what direct3d with full screen hq2x.fx filter looks like: https://i.imgur.com/uS9EO8S.png

I thought if you select all scaling to be done by GPU in your control panel, which the OP seems to have done then the monitor shouldn't do any scaling itself. GPU does all conversion from 640x480 or whatever by stretching or adding borders depending on your settings in your GPU panel, and sends it to the monitor in its native resolution. Is it not so?

I used this build and borders are away now. But the screen looks really stretched, a little bit unnatural. The head is a little bit wide, doors are as well.

I attached screenshots of same position. One with no borders using DOSBOX with build mentioned above. Second with borders using normal DOSBox (there were borders on left and right, but on screenshot taken with "WinKey + Print Screen" they do not appear, propably it is because scaling is performed on GPU and not on monitor).

So it really looks like that borders are normal.

Thanks to you all for help.

Exactly. The game was meant for 4:3 monitors.

The fullscreen stretching you seen is probably because of aspect=false. Change it to aspect=true. Then the borders will be back and it will not be stretched anymore. You gotta pick one or the other with these games.

Also, for the build I gave, the point of giving that build is to allow the usage of the following settings with it:
output=direct3d
fullresolution=0x0 (or choose your own, or choose your window resolution as well)
scaler=none
pixelshader=hq2x.fx

that to leads to graphics like the image I provided: https://i.imgur.com/uS9EO8S.png

Also if you are in windowed mode you can play around with a lot of settings using the that build's menu bar. For example try a whole lot of different pixel shaders without having to restart dosbox/game. Warning: some of them are very CPU or GPU intensive and may cause DOSBOX to freeze/crash.

Yes, with aspect=true borders are back.
But I will rather play with borders than unnatural stretched screen.

I was firstly afraid that borders are sign of some bad setting.

Anyway, what's the difference between scaler and pixel shader?

That's quite normal especially when you have aspect ratio enabled.