In the interests of getting things started as I am interested in the idea (mutable strength of its foes), but pondering what level this is most fun to play at. I began with a clay golem statblock - all numbers are up for change
Okay, to begin with a Gray Sqaarg does not have immunity to weapons like a clay golem. Drop that immunity and its Challenge will drop considerably.
The creature should have some kind of grapple attack for restraining opponents without injuring them. That's its preferred means of combat. Gray Sqaargs only use lethal force as a last ditch option.
The "Strength of its Foes" is tricky to adjudicate. Will have to think about it.
A major problem is the original "The sqaarg always fights with a strength’ equal to the combined strength points of those fighting it" and "The monster can have a maximum strength of 40" simply makes no sense in D&D, even in first edition, since a creature's Strength score is not a linear quantity and the maximum strength possible in the rules is 25.
If you interpret it as being a Sqaarg has a maximum strength equal to four men (since 40 is four times the average ability score of 10), that's roughly equivalent to a score of Strength 18/00 or possibly
19 in terms of lifting capacity. An ordinary 1E AD&D human with Strength 10 can stagger around with 105+ pounds when heavily encumbered, so a creature four times stronger should be able to lift 315+ pounds more than that. The 1E Player's Handbook
Strength table says Strength 18/00 has a weight allowance +300 pounds higher than an ordinary human (well +3,000 coins to be precise, or "gold pieces" if you want to be literal, with a "coin" being a tenth of a pound).
That suggests a "40 points of Strength" Sqaarg might be at the maximum limit of human strength rather than an impossibly powerful titan stronger than the mightiest god.
I'm wondering if a Sqaarg doesn't actually draw STR from its opponents but just automatically "pulls its punches" and only uses its full Strength when assaulted by multiple opponents.
The main thing is I'd like to keep it simple, and that'd be difficult if the Strength keeps on changing. For a start, the Sqaarg's to hit and damage numbers would change depending on how many opponents it is fighting and what their strength scores are!
It'd be easier to just stat it up with a single STR score set to its maximum strength, whatever we decide that to be.
Hmm, I suppose we could make it so its default Grapple attack has a DC that varies with the number/STR of opponents but have a set STR for when it's trying to kill people?