There are numerous strategies to killing him, depending on your particular taste (possible spoilers).
- Hack 'n' slash - surround him with your biggest fighters and go to town on him (hit him from all sides to minimize the effect of wing buffet and his breath weapon). Protection from fire and other spells are helpful, though he has a tendency to dispel at least once during the fight.
- Traps - lay tons of traps right in front of him and watch him die before the battle even begins
- Spells - cast magic resistence on him which serves to make him more susceptible to spells and hammer away (or hit him with a harm and a maggic missile to make short work of him)
- Cloudkill - hit him with half a dozen or more cloudkills at once, and he might die before he can heal himself.
Some ways are cheesier than others. He can definitely be killed in hand to hand combat without any tricks if you're a purist. You should be able to find numerous posts with greater detail if you run a search.
I think Keldor is the only paladin NPC, so the sword is only useful on him when it comes to NPCs. I encountered 5 dragons my first time through the game. As far as I know, if you want the silver dragon blood, you have to kill her for it. The armor is evil only, so if you want it, killing a silver dragon shouldn't play on your character's conscience very much.
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