The interaction between dam foundation and rocks plays a significant role in the design and analysis of concrete arch dams. In the current study, comprehensive dynamic analysis of the dam-reservoir-foundation system is performed by developing a non-linear finite element program. The objective of this paper is to study the seismic behavior of a concrete arch dam taking into account the effects of foundation discontinuities and foundation inhomogeneity on the stability. Proper modeling truncated boundary conditions at the far-end of the foundation and reservoir fluid domain as well as to correctly apply the in-situ stresses for the foundation rock represents field conditions in the model more realistically. In this paper, the nonlinear seismic response of the dam-reservoir-foundation system includes dam-canyon interaction, dam body contraction joint opening, discontinuities (possible sliding planes) of the foundation rock and the failure of the joined rock and concrete materials. The results for the Karun 4 dam as a case study revealed the substantial effect of modeling discontinuities and boundary conditions of the rock foundation under seismic excitation that needs to be considered in the design of new dams and can be applied to seismic safety evaluation of the existing dams.