I'm pretty sure if was meant to be played with keyboard and mouse, but yes, it is odd that the menus are keyboard-only. I thought the mouse aiming worked well, though.

There are "joystick" options in the control options, but I doubt they work very well; back then there weren't many gamepad-type controllers for PC games, and the ones that did exist didn't function the way they do today (in terms of how they communicated to the computer). I doubt Outcast would recognize a controller if you plugged one in, but if you have software to map keyboard and mouse commands to your controller you could probably make it work.