Killing the toughest dragon on the Darkside of Xeen

I've done it, so yes, it is tough, but it can be done.

To do so, I avoided everything single item and location in the game that awarded a static level increase.

I played the game spending money on level increases until there wasn't enough gold left in the game to provide additional levels. (The cost for one level increase exceeded the greatest treasure pile in the game).

At this point, I went through the entire game again activating all the items, fountains, NPCs, etc., that would provide a free level increase. By doing this, I was able to attain a higher level than possible otherwise. (I believe my level was around 160). I killed the megadragon but I believe only two of my characters survived the ordeal.

Guessing you're talking about the Mega Dragon. I'll refer you to this thread: http://www.abandonia.com/vbullet/showthread.php?p=288395 where they cover most of the strategies to use.

Sure, why not? >L100 characters + full Obsidian kit + 2500HP boost + other Well boosts + Day of XXX spells. Melee weapons with bonus against dragons are a bonus. If you want cheese, use the Xeen Slayer Sword.

Note that the Barbarian dishes out the most damage (manual is wrong on the Knight), based on the number of attacks per level.