Eh? It is exactly the scenario I went through. I played as mage, I had Archmages in army, morlae went down. I removed them, morale still went down. Becasue I had no human units, I suppose.

Actually i had human units in the army, always with it so i did not test it enough. Maybe i will test it with another playthrough.

For such things I am using Russin fan manual - it is very detailed.

According to it, in case of Archmage's Staff: English translation: Any other behavior should be considered as buggy. That said: I will try to search Russian forum for bugs concerning this item. If there are no post about it, it could be one of the bugs caused by pirated exe which GOG's version has got instead of official one.

My quote: http://www.gog.com/en/forum/general/kings_bounty_gog_version_is_bugged/page1

Nah, I don't have cracked version.

It never increases morale? Not even with human army?

I have to try it, I'll try to hire some humans and see if the morale at least stays the same.

EDIT: I can't try it as one of my saves is just before final fight and have nowhere to recruit human troops and the otehr one is right before the end of game where I can recruit them but I think there not a single enemy to try it on and as I tried morale doesn't change when fighting other item.

By itself / after normal fight - no. You need todo special fight with towers to increase it.

Well, you do not need enemy "around" - you can "fight with items" if you have any other item with morale.

As I said, when I tried to fight item (Demetrius) both with Archmages in army and without them, nothing changed and I think even Elven Crown morale didn't change so I concluded morale is not affected by item fights.