from what I understand you can do it this way:

-download the DOS32A release (zipfile with various files)
-copy SB.EXE and DOS32A.EXE to the directory with the executable you want to modify
-make a backup of the executable
-run sb /R myexecutable.exe

Taken from here:
[url=http://www.uesp.net/wiki/Daggerfall:Corrupted_Savegames]http://www.uesp.net/wiki/Daggerfall:Corrupted_Savegames[/url]

A different way seems to be to simply call the extender with the executable as parameter and further parameters get passed to the executable:

\dos32a\dos32a.exe myexecutable.exe z.cfg

taken from here:
[url=http://www.uesp.net/wiki/Daggerfall:Running_Under_DOSBox#Configuring_DOSEmu]http://www.uesp.net/wiki/Daggerfall:Running_Under_DOSBox#Configuring_DOSEmu[/url]

EDIT: Oh, wait, there is a better overview here:
[url=http://www.dosbox.com/wiki/TOOLS:DOS32A]http://www.dosbox.com/wiki/TOOLS:DOS32A[/url]

I've renamed DOS32A.EXE to DOS4GW.EXE as you mentioned in part EDIT, I've changed memsize to 32MB, but error still persists. Nevertheless I don't give up, maybe it would be necessary to e-mail Peter Molyneaux :-)

The best solution would be if GOG could release the extended edition with the bonus levels. From what I've read it's supposed to fix a lot of bugs that were in the original game due to it being rushed to store shelves. Perhaps this bug is one of them?

I think when you speak about "extended edition" you mean Magic Carpet Plus (Magic Carpet with datadisk Hidden Worlds on one CD). I'm playing this version of Magic Carpet instead of GoG version, so this problem is not among the problems Magic Carpet Plus solves.

Nevertheless I've finished level 35 in which the bug occurred. A have solved it by killing respawning archers fast enough because the bug was caused by creature respawn in the first place (normal behavior is that creatures are only spawned when player triggers something, not respawned indefinitely). Anyway, thanks for your help.

This was a bug in the original game, I remember it then too. There's one level both in the original and the GOG version that I could never get through without it locking up, I think in the high 20s early 30s or so, I just used cheat codes to get past it.

There's another level earlier one where it will occur but I usually get through it by going as fast as possible to be able to progress rather than focusing on high score.

It is indeed caused by buildings spawning too many human walkers.

It's level 14 (Nazzajahn) that prevented me from proper completion - finally I gave up and used a cheat once I had found the hidden spell and advanced far enough before the bug would appear.
My Youtube video with instructions can be found on the link below:
youtu . be / Ovs1-zR1sPw

Cheat activation:
1. Press I key.
2. Type letters Q U I C K in the prompt that appears at upper left of the screen. This applies to GOG version of the game, other versions may need the word R A T T Y instead.
3. Press Shift + C to complete the level followed by spacebar press.