“Long ago, my people knew the secrets of advanced technology. The archaeological evidence proves that. But I wonder where it came from? And where did it all go? I guess some questions will never be answered...”
— Dwarf
Dwarf is a valley resident who lives in The Mines. Initially the way is blocked off by an unbreakable rock, just inside the entrance. After upgrading to a steel pickaxe the stone can be broken. A cherry bomb also works.
Dwarf will start out speaking Dwarvish, which is unreadable by the player. In order to understand Dwarf you must acquire the 4 Dwarvish scrolls from within the mines. After donating them to the museum, Gunther will give you a language scroll to use which allows the player to understand Dwarf's speech. This must be obtained for the player to access Dwarf's shop or raise Dwarf's friendship level.
Dwarf is apparently one of a race of Dwarves. They were once powerful and advanced but now only relics remain as artifacts. Krobus describes a 1000 year war between the dwarves and the shadow people, as such Dwarf is sometimes suspicious of the player of being a spy sent by the shadow people.
Note that there is a bug which prevents the Dwarf from giving the Neutral response dialog (he always gives the Dislike response instead). Friendship points are unaffected (Neutral gifts give +20 toward friendship).
Enter the Sewers. You need to have bought a Stardrop from Krobus.
Details
Dwarf finds Krobus in the Sewers and blames the Shadow People for the death of his family. Krobus retorts by saying that they only resorted to violence after the dwarves drove them from their ancestral homeland. Krobus gives an apology for what happened to Dwarf's family but he doesn't accept it. They both start fighting. The player descends into the Sewers and gets between them. Dwarf yells, "Let me at him! He's despicable." Krobus retorts, "Come and get it, shrimpy." Suddenly, the Wizard appears and stops the fight. He reminds them that "The Elemental Wars have long been finished" and tells them to make peace for the sake of the humans that live around them. Dwarf consents to this and promises to stay away from the sewers. Krobus once again apologizes for the past and states that he has no personal gripe with Dwarf. The Wizard casts a 'Seal of Promise' to finalize the agreement.
The Dwarf is unable to give the Neutral dialog response to a gift. Instead, he gives the Dislike dialog response. Fortunately, friendship with the Dwarf is changed correctly (+20 points) despite the incorrect dialog.