Moonwood

Oh this is going to get rough. Go to the Spine of The world and then into a cave to the north.
Welcome to the fire giant lair. The fire giants themselves aren't very hard enemies its just they hit hard but don't hit often. Ice works wonders on them. You may explore other portions of the lair but you need to go only to the east portions to complete the quest.
In the east wing and below you will eventually meet these guys:

Skraag - king of fire giants. He can really make your life shorter. First, he is a fighter type like all other fire giants, second, he hits much more often than the others and does a little more damage but thankfully he's a fire giant. Ice him to death or if you don't use magic, well, fight him and hope that you'll survive more than a minute. Use the Stone of Recall to heal yourself and come back and whack him to death.

Death Slaad Lord. One word - damn! I was a wizard and I ran out of spells before I could kill him! But on the other hand, fighter types should be well equipped by now and have little to no problems fighting this Slaad. As for the wizards, well, spells don't work very well. Stone of Recall as always is the most useful item.

You should be in the Dragon Cave by now and you might want to make your life easier so… It's slaughtering time!

Blue Dragon. Well, what can I say? It's a dragon! Bash bash, Stone of Recall, return, bash again. Go to the nearby pool, take the sphere and place it on the altar. This will produce a Dead Dragon Sphere which you will be able to use or not to use later.

And there it is! Klauth the magnificent!
Klauth the Red Dragon. Now you have two choices. You can either kill him (the good way) or work for him (the evil way). I haven't tried working for him so don't know much about it. Killing him would be very good because you would get a lot of experience and a huge pile of magic items. But give him the Dead Dragon Sphere before fighting him. It will get him to Badly Wounded state and he will be a bit easier to fight. Even in badly wounded state he is extremely hard to kill as he does about 30-40 damage each hit and will get you to 0 in no time. Be sure to have a lot of Heal potions, you'll need them all. His fire breath does extreme damage so watch out. Use Stone of Recall as long as you have to.

He is the toughest enemy in the game. Get the last Word of Power and head back to Aarin to initiate Chapter 4!