The duergar (grey dwarves) are an ancestral off-shoot of the dwarvish people. When the First Disciple of Kord spoke the Red Curse, not all the harm it brought was inflicted on the Giant people. Some of the few dwarvish survivors were also affected, in a way that uncovered terrible new powers within the dwarf brain, neither magic nor god-granted; abilities which altered the physical world by the mere power of the wielder's mind.Unfortunately, these powers cost a terrible price; insanity. The changes required to allow the dwarven brain to wield them unseated the stolid, rock-wise dwarven personality and sent it spiralling down into chaos and destructiveness. Bitter fighting ensued among the dwarves, as those who chose to take up the new powers were opposed by the dwarves who held to the old ways. Eventually, the grey dwarves were overcome and forced out of the dwarfcastles, fleeing to the deeps of the Underdark for refuge.
It was assumed that they had died out there, until the Dragonslayer Hildraft Bogadun encountered several in the ruins of Durgeddin's fortress of Khundrakhar. How widespread the grey ones are at present is unknown, but the Kings of the Dwarfcastles are no longer complacent that the Grey Dwarves are merely stories out of legend.