I'm about to head into that fight with Malavon. I scouted it out and it looks like it's going to be a hairy one and there are a lot of innocent gnomes around. Is there any way to save them?

Not the ones around him. When you first get near him, a convo with him and he ends up killing all the gnomes around him. Nothing you can do about it and no way to stop it. The other ones around his lair you can avoid killing if you don't use lethal AoE spells.

I know I can cut a deal with his sister in the palace doing something with the Oil of Nullification. Does that help with the fight at all?

It frees Ginifae from Malavon's spells that keep her trapped. No help in the fight (since, as far as I can remember) you can't get the Oil until after fighting Malavon anyway.

Yeah, I googled a bit and found a walkthrough that says it will nullify his contingency spells. Not sure if that's accurate or not though.

I read that, too, but I'm wondering what contingency spells. I think it just frees the girl.

I'm finding this whole quest line to be odd, though. I mean, the big reward comes if you let the wife-beating gnome-abusing Marketh live, and free the evil drow from her binding to her equally evil brother. I would think that the way a party of any good alignment would go about this is to kill them all and let Torm sort it out.

Ok, I'm trying to come up with a good strategy for this battle, as I know it's a tough one. I took a shot at it already, and things got too messy too fast. How does this sound?

I have a paladin, cleric, thief, and mage. I'll buff everyone up then send the paladin in alone with a potion of invisibility in her inventory. She triggers the convo, then gets to Malavon before she can get surrounded. Hopefully, she can take him out before taking too much damage. Otherwise, she drinks the potion to at least disappear. Then, I have a cleric or mage send in some summons to lure the enemies off to the side. While out of sight, I have the mage cast acid fog, which will kill the summons but hopefully the golems and umberhulks will just stand around as there is nobody for them to target (the mage being out of sight, and the paladin being invisible). I might send another wave of summons into the fog, just to be safe. Once the acid fog does its thing, if there's anyone left standing, I'll either have the mage use some AoE spells to clean up the rest or just send the paly over to mop up. Right when the paly becomes visible, I have the cleric and thief rush in, with the thief shooting arrows at Malavon and the cleric dropping a command word: die just to buy some time.

My only concern is that the umberhulks and golems will ignore the paly and go for the gnomes who are running away (towards the rest of my party that's hidden). This strategy is contingent upon keeping everyone in that one room. This is a pretty tricky battle, though, and it's only against a simulacrum.

Is there a more effective strategy?

Edit: This actually worked really well. The trick was to not turn the paly invisible after taking out Malavon. A fully buffed paly (courage, hope, chaotic commands, haste, prot. evil,) took out the simulacrum in two hits and the golems and umber hulks shortly thereafter without even taking a hit. Chasing Malavon around afterwards was a bit of a chore. Between his stoneskins and mirror images, it took a while before I could even get a hit in. Otherwise, no problem.

Awesome! The only thing I was going to add to your strategy was to remind you to use something like Chaotic Commands, but you had it covered anyway. Well done.