"إنما حرم الله الصناعة التی حرام هی کلها التی یجیء منها الفساد محضاً نظیر البرابط و المزامیر و الشطرنج و کل ملهو به و الصلبان و الأصنام و ما أشبه ذلک من صناعات الأشربة الحرام و ما یکون منه و فیه الفساد محضاً"
"The Almighty Allah has prohibited the manufacture of all such things that are exclusively used in Haraam ways; and things that only create evil like pipe, flute, chess and all types of instruments of gambling, images, statues and the likes of them including the manufacture of Haraam drinks and all such articles which entail only evil."
According to this tradition, whatever causes or entails "lahv" is haram. What type of "lahv" does it refer to? Does it refer to all kinds of recreations and entertainments?
Although the term "کل ملهو به" [everything that creates evil] implies the prohibition of everything, if we go through the verses of the Quran and the traditions of the Infallibles (a.s.), we will come to the conclusion that, according to Islam, different rules and injunctions apply to different recreations and entertainments. Thus, those kinds of entertainments which are idle and used to give people joy and physical pleasure are not endorsed nor are they evaluated as befitting for the personality and character of a faithful believer. Those entertainments which cause God's injunctions to be violated, though the intention might be sincere and altruistic, are prohibited in religion.
Apart from these two instances, there is no problem in the healthy recreations which are meant to create diversity in one's life. In fact, as per the sayings of our religious leaders, man's material and spiritual progress would be curtailed and hampered without such recreations. For this reason, it is permissible to use recreations under specific circumstances and conditions such as when they do not make you negligent of God's remembrance or in the observance of others' respect and protection of environment and so on and so forth.
First of all, it is necessary to assess the referential value of this narration and then we shall study the pros and cons of recreation and entertainment:
According to the sources available to us, the first book that has published this hadith is "Tohaful Uqool" authored by Hasan bin Ali bin Shu'abah Harrani, one of the 4rth Islamic century Shiite scholars and a contemporary of Shaykh Saduq.
The author of this book states that traditions collected by him do not feature a jurisprudential aspect. He says that he has written this book with a moral approach. That is why he has omitted the chain of the narration and sufficed to mentioning its text only.
Based on the above, the tradition existing in your question is mursal [lacking names of narrators or chain of transmission] according to hadith sciences. Despite the book being reliable, the hadith cannot be used as an evidence to substantiate a jurisprudential rule. It is therefore necessary that the hadith and its consistency with the Holy Quran be studied.
Now stay with us until the end of this study so that we may give you the conclusion which we shall attain at the end:
In a broad perspective, it can be said that if we remember the heavenly bounties and their perpetuity, all the matters relating to this world, irrespective of whether they are halal or haram, have been described as "play and amusement". There are many Quranic verses that have presented such a broad concept introducing the world and everything in it as "lahv" and "la'eb" (pastime and amusement). 
Contrary to the above, the term "lahv" in some other verses of the Quran refers to only ordinary amusements or entertainments which lead a person astray from Allah and make him negligent of His remembrance.
Religious scholars and exegetes have mentioned several meanings for the Arabic word "lahv".
On the other hand, what we call "tafrih" (recreation) in Farsi, though derived from the Arabic word "farah", means delight or happiness. However, this word has not been used in Islamic texts. To convey such a meaning, normally other words such as "tanazzuh" or "tafarroj" and/or "lahv" are used and the exultant or those people who indulge in unrestrained delight are referred to and known as "fariheen". Although God says in the Quran that He does not love the exultant (fariheen) and He considers unreasonable and untruthful exultations as one of the reasons for the punishment of the dwellers of Hell, He uses the root word "farah" to order the believers to be happy for the unseen divine spiritual assistance and when God describes the situation of the martyrs, He says that they are busy rejoicing in what Allah has given them out of His grace.
What was mentioned above and similar instances indicate that (almost) synonymous words such as "lahv" (pastime), "la'eb" (play), "laghv" (vain talk), "tafrih" (recreation), "amusement" etc. have different manifestations and that every individual can engage in them with various motives, in which case, it is naturally difficult to give a general answer to it. In fact, every single case would have a separate ruling according to Islam which we shall enumerate and deal with as follows:
1. Entertainments and recreations which are combined with things are prohibited in Islam. No matter what the intention may be, if an entertainment involves drinking alcohol, using drugs, gambling and listening to frivolous and licentious music, it is not permissible. In such cases, never does an end justify a means. For instance, one cannot organize a concert or an event without observing religious rules, even though the money from the ticket sales might be used for charitable purposes such as helping the needy, freeing captives and so on.
In such cases, the holiness or charitableness of a project cannot serve as a justification for haram entertainments. In the Holy Quran, staying away from such things is considered to be a sign of believers.
2. Human beings are in need of diversity and recreations in order for them to continue their lives and have high spirits. Humdrumness will curtail their daily activities and will even harm their spirituality. Having said that, the question which arises is: Is Islam opposed to all kinds of recreations and entertainments?
If you go through the authentic Islamic sources you will come to the conclusion that the recreations and entertainments which do not lead a person astray from the right path and which do not cause him to fall into a sin are not only permissible but they are also completely approved and endorsed by the religion because they play an undeniable important role in the upkeep of a healthy life.
Now, we shall present a few examples in this regard:
2-1. Although in many cases the term "la'eb" has been disproved, when Jacob's children proposed to their father to let Yusuf go out to play and have recreation with them, Jacob did not tell them that recreation was not appropriate of faithful people. He just expressed concern about Yusuf's safety and the likelihood that he might be harmed by someone. When they returned home and said that they had left Yusuf to take care of their belongings, Jacob did not reproach them for having had a competition and engaged in recreations.
It can be concluded from the above that recreations and competitions are not considered to be undesirable per se.
2-2. It has been reported from Imam Sadiq (a.s.) that he said: "A Muslim must divide his time into three parts. One part should be reserved for earning livelihood, one for Allah's worship and the third for engaging in healthy recreations which do not involve any haraam. Engaging in recreations will help a believer to perform the first two deeds in a better way."
This tradition by itself indicates the permissibility and desirability of healthy recreations.
2-3 – Some narrations go even further determining and sorting out the type of entertainments with a view to the personal and moral traits of individuals. For instance, it has been narrated that weaving and knitting is a good entertainment for a good-doing woman. In another hadith, keeping and training horses and shooting competitions are considered as suitable entertainments.
The conclusion which we draw from this group of narrations is that it is better to use such entertainments which also have a benefit other than recreation. It is not necessary, in view of the technological advancements and proliferation of industries and existence of textile and automobile factories, that we should confine ourselves to the instances which have been mentioned in the narrations.
3. Apart from the lahv and haraam entertainments which are absolutely forbidden, and also apart from reasonable and objective recreations which are permissible, are there any restrictions in the recreations and entertainments including the allowable ones?
In our surroundings we come across people who spend most of their lives in vain. It has become a mood or a moral habit for them to pass their time idly and engage in vain entertainments and recreations.
Recreations for such people are not a means for reaching an end; rather the recreations themselves constitute their ultimate objectives. Such people believe that life is not but rejoicing and exultation. They do not think about anything beyond entertainments. They even consider religion and religiosity as a means that provide them entertainment.
These exultant people are not moderate; hence, whenever their ends are met and when they have benefited from Allah's bounty, then they start wasting their time and engaging in idle activities. If they run into a problem in their lives, they get frustrated and hopeless.
Can Islam, which introduces lofty values to humanity and considers spiritual growth and perfection to be man's real value, approve of such a behavior? As was explained in the second part, healthy recreation is considered appropriate and suitable only when it constitutes a small part of your life and when it really assists you in achieving and promoting your material and spiritual goals. Therefore, they should not be expanded so much as to cover an individual's entire life.
Imam Ali (a.s.) says in this regard, "Do not spend all your life in wastefulness and amusement that you may not have anything in store for the next world." He also says, "Vain pastime and amusements prevent man from engaging in serious matters."
If at times we see our religious leaders forbidding people from engaging in idle and vain activities by tell them, for instance, that "there is no joke in Islam, no vainness, no idleness, everything is serious and every action is serious and purposeful" it is not because recreation is forbidden. In fact, they advice is because they want the entertainments should be designed in a meaningful way so that they serve a purpose in which case not only the recreations would not be haraam or makrooh (undesirable) but they would even be considered as necessary in a person's serious life.
Having said that, we can now conclude that every recreation is not haraam and if we do not commit any haraam act, we can also have recreations in order that we may have diversity in our lives. However, we must note the following points:
1. Even when we have halal recreations we should not become negligent of God's remembrance. God, the Exalted, says, " O ye who believe! Let not your riches or your children divert you from the remembrance of God." Else where in the Quran, God says that the real believers are people whom neither merchandise nor selling diverts from the remembrance of Allah and the keeping up of prayer and the giving of poor-rate." The Commander of the Faithful, Ali (a.s.) said that whatever diverts a person from the remembrance of God amounts to gambling.
There are many stories in the Quran about people with weak faith, people who left the Friday Prayer and the Holy Prophet (s) alone as and when they saw merchandise or amusement or heard that such things were somewhere. Such people have been strongly reprimanded by God.
Therefore, it is necessary for us to be cautious so as not to fall in the trap of people who, knowing our tendency towards recreation, may lead us astray from the right path.
2. The entertainments should not occupy our minds to the extent that when the time of our recreation has come to an end and when we are apparently busy offering our prayers, our thoughts are still wandering around the recreations, because God does not fulfill the wishes and prayers of a person who does not have concentration in his prayers.
Imam Khomeini (r.a) while reproaching excessive attention to music says, "All the attention and the entire brain become musical brain; the serious brain is replaced with lahvi brain (one which is used to debauchery and pastime). One should think about his fate…"
3. The entertainments should be with a meaningful purpose because an action done with different intentions can have different rules. That is to say, depending on the intention, different rules would apply to a single action.
One of the followers of Imam Ja'far Sadiq (a.s) asked him about hunting which is a kind of entertainment for some people. In response, the Imam divided the hunters into three groups: One group of hunters hunt to feed their family or for their substance, the second group's profession is hunting; they hunt to gain an income and the last group of hunters hunts just for recreation. As for the first and second group, there is no problem with them but a believer (momeen) does not have time to spend (days and weeks) hunting for a purpose which is of no benefit for him. (In other words, it is not appropriate of an adherent Muslim to be put in the third group.)
Based on the above, hunting which only servers to destroy the environment is not considered to be a healthy recreation. And if it is with a different intention, it can be both recreation and a source of income.
In the same way, recreational sports are very good, if the intention is to remain healthy and physically fit but it is not befitting for a believing individual to engage in recreational sports only to pass his time. The position is the same with other recreations in the sense that it is the motive of the individual that serves as a criterion for its desirability or undesirability, goodness or badness.
4. Since every individual is aware of his intention, he himself better knows what he engages in recreations for. He knows better than everyone else whether his intention is to pass his time or to freshen up or to have a kind of diversity in his life.
5. When having recreations with others, one must be careful not to control his emotions and observe the respect of other individuals in his company because it happens sometimes that a person starts a recreation or entertainment and he ends up having a fight with someone."
Now, it can be said that the narration in Tohaful Uqool has been narrated in line with the same objective because there is a point in the narration which confirms what we have been trying to substantiate. It says: "…and all such articles which entail only evil" and we know that healthy recreations with a positive purpose does not entail any evil.
 - Harrani, Hussain bin Shu'bah, Tohaful Uqool, pg. 2- 3, Jeme'ah Mudarresin Publications, Qom, 1404 A.H.
 - Al-An'am, 32: "What is the life of this world but play and amusement? But best is the home in the hereafter, for those who are righteous. Will ye not then understand?"; Al-'Ankabut, 64; Muhammad, 36; Al-Hadid, 20.
 - Luqman, "And of men is he who takes instead frivolous discourse to lead astray from Allah's path without knowledge, and to take it for a mockery; these shall have an abasing chastisement."
 - See: Ibn-e Manzur, Lesan al-Arab, vol.15, Sader Publications, Beirut, 1414 A.H.
 - Al-Qasas, 76: "Verily, Allah does not love the exultant."
 - Al-Ghafir, 75:"That is because you exulted in the land unjustly and because you behaved insolently."
 -Yunus, 58: " Say: In the grace of Allah and in His mercy-- in that they should rejoice; it is better than that which they gather."
 - Aal-e Imran, 178: "فَرِحینَ بِما آتاهُمُ اللَّهُ مِنْ فَضْلِه".
 - Al-Mumenoon, 3: "And who keep aloof from what is vain."
 - Al-Anbiya, 2; Zukhruf, 83; Al-Toor, 12 etc.
 - Yusuf, 12; "Send him with us tomorrow to enjoy himself and play, and we shall take every care of him."
 - Yusuf, 13: " He said: Surely it grieves me that you should take him off, and I fear lest the wolf devour him while you are heedless of him."
 - Yusuf, 17: "O our father! We went racing with one another, and left Joseph with our things."
 - Kulayni, Muhammad bin Ya'qub, al-Kafi, vol.5, pg. 87, hadith 1, Dar al-Kutub al-Islamiyah, Tehran, 1365 (1986).
 - Shaykh Saduq, 'Elal al-Sharaye', vol.2, pg. 583, hadith 23, Al-Dawari Library Publications, Qom
 - Kulayni, Muhammad bin Ya'qub, al-Kafi, vol.5, pg. 50, hadith 13.
 - Al-An'am, 70: " Leave alone those who take their religion to be mere play and amusement, and are deceived by the life of this world."Al-A'araf, 51
 - Al-Rum, 36: "When We give men a taste of Mercy, they exult thereat: and when some evil afflicts them because of what their (own) hands have sent forth, behold, they are in despair!"
 - Amadi, Abdul Wahid bin Muhammad, Ghurar al-Hekam, pg. 461, hadith 10562, Islamic Propagations Office Publications, Qom, 1366 (1978).
 - Ibid, hadith 10550
 - Sahifa-e Noor, vol.9, pg. 454.
 - Al-Munafiqoon, 9: "یا أَیُّهَا الَّذینَ آمَنُوا لا تُلْهِکُمْ أَمْوالُکُمْ وَ لا أَوْلادُکُمْ عَنْ ذِکْرِ اللَّه".
 - Al-Noor, 37: "رِجالٌ لا تُلْهیهِمْ تِجارَةٌ وَ لا بَیْعٌ عَنْ ذِکْرِ اللَّه".
 - Shaykh Tusi, Al-Amali, pg. 336, hadith 681, Dar al-Thaqafah Publications, Qom, 1414 A.H.
 - But when they see some bargain or some amusement, they disperse headlong to it, and leave thee standing. Say: "The (blessing) from the Presence of Allah is better than any amusement or bargain! and Allah is the Best to provide (for all needs)."
 - Lumqan, 6: "But there are, among men, those who purchase idle tales, without knowledge (or meaning), to mislead (men) from the Path of Allah."
 - Kulayni, Muhammad bin Ya'qub, Al-Kafi, vol.2, pg. 473, hadith 2.
 - Sahifa-e Noor, vol.9, pg. 464.
 - Majlisi, Muhammad Baqir, Behar al-Anwar, vol.73, pg. 356, hadith 22, Al-Wafa Institute, Beirut, 1404 A.H.
 - Qiyamah, 14; "بَلِ الْإِنْسانُ عَلى نَفْسِهِ بَصیرَة".
 - Ghurar al-Hekam, pg. 461, hadith 10554.