Here is something that could be used in constructing a mythology for Mystaran Dwarves. This is written mainly from the point of view of the Rockhome dwarves, and other cultures might have slightly different version of the same story. Let me know what you think!
Legends of the Dwarves
From the Mystara Mailing List posted 09 June 2002.
There were dwarves in the old days as well. Even in the days of the legendary Kingdom of Blackmoor there were dwarves. But Blackmoor was ruled by human sorcerers. The Sorcerors did great and magnificent things. But their hunger for power was greater than their wisdom, and in their arrogance, they summoned magic so powerful that they could not control it. Disaster washed over the land destroying the ancient kingdom in the Great Rain of Fire. It made summer winter and day night. It filled the air with terrible magic and poison. Humans, elves and dwarves were dying. Karr the Evil One, the Destroyer of All Things, whom Men call Thanatos, was laughing, for unwittingly the Blackmoor Sorcerers had become his servants and the disaster they had caused threatened to end all life as is what Karr seeks.
It was then that the dwarves cried out for Kagyar, Lord of the Mountains, their old protector and teacher whom they had forsaken, and asked him for help. Kagyar, the Artisan, took his loyal followers back into his forge, where he reforged the dwarven race into a new and stronger one. There were some who could not be improved, who were weak and frail. For these, the Kogolor Dwarves, Kagyar created a secret kingdom where they will be safe and protected until the end of Time. But the rest he made strong and hardy, resilient to magic and poison so that they could survive even in those terrible and deadly times.
But there were also dwarves who were not thankful for the gifts that had been given to them by Kagyar. They did not wish to serve the Artisan they said, only themselves. These were called the Modrigswerg and Kagyar cast them into the deep into the bellow of the earth where they live still. But for his loyal followers, Kagyar created a kingdom, Dengaria or Rockhome. The first dwarven kingdom of the Younger Dwarven Race.
Garalin*, the Gemmaker was Kagyar's brother. He saw what a magnificent race, Kagyar had made and grew jealous. In his own forge, Garal made his own race, similar to what Kagyar had done. But Garal never had the wisdom nor the skill of his brother. The race he created was the Gnomes, the Fireborn, who were but a shadow of Dwarves such as Garal's skills are but shadows of the skills of his brother. The Gnomes were not as strong and mighty as the Dwarves and were not able to build a mighty kingdom of their own, but were forced to live among other races, living off their goodwill.
Then Denwarf, "He Who Is Born of Rock", came to the Dwarves of Rockhome. He was Kagyar's apprentice, the perfect dwarf, and Denwarf became the first Dwarven King. Denwarf ruled long and wisely. But even dwarves grow old, and the Dwarf Master felt that his body was weakening after long years of peace and prosperity under his rule. He went into the forge, and made himself a new body of rock and steel, so that he could guide his people for coming centuries as well. But Kagyar spoke to him then and said: "Are you not happy with the body that I have given you? Seek you to improve on the work of your Master?" And Denwarf answered: "forgive me lord, for it is not arrogance that has lead me to do this work. But is it not an apprentice's task to learn from his master?" Denwarf answered: "Very well. You will have this new-forged body, but for now you must leave Dengaria, the Rockhome, and allow younger dwarves to rule themselves. I will let you return to the Dwarves when it is once again need for you among them." Denwarf had seven retainers; these became the Dwarven Lords, founders of the greater clans.
*Garalin is the dwarven name for Garal Glittergold, also referred to as Garel, or Garl Glitterlode.