I think that you are correct in most of your theory, however I had an idea about how the Leveller "posesses" heros. Perhaps it is possible that rather than taking over him magically, he shows in the "Ultimate Truth" or what the world would be without the Levler: overpopulation, horrible wars between the races, and pretty much the desimation of the entire myth world. The image is powerful enough that the chosen hero returns to the myth world with the added power of the Leveller and destroys as much as he can. This of cource also conflicts with your ideas about a confused Balor, but this idea seemed a bit farfetched from the begining. Easier explanations for having Soulblighter sack Muirthemne is that perhaps he didn't have the heart to do it, after all if he retained his hate of Myrkridia could he not retain his love of Muirthemne? The reason for not killing Alric would probably be, as you mentioned, that he wanted to convert him to a Fallen Lord.
Unfortunately, both our theories have holes in them. The Levellers dont seem to WANT to retreat after they have created enough carnage. They have to be defeated, why would this be if they do not wish to truly destroy everything in the world? Perhaps they all just want to destroy all the dominant civilisations completely and have them start from scratch so that no apoliptic magics or technologies ever evolve?
-Milk Man
P.S. The Ghols are not part of the younger races, they remember the names of the dark gods and had contact with the Trow during the height of their civilisation.
