So, as small creatures with mighty build, dwarves would end up having the following stats:
- 20-foot rate of movement
- treated as medium creatures for grappling purposes
- treated as medium creatures for purposes of encumbrance and load
- the ability to use medium weapons without penalty
- +1 size benefit to AC
- +1 size benefit to attacks
- +4 size benefit to hide checks
As small creatures, their movement rate is 20 feet (as now). They'd be able to wield medium weapons with penalty (as they do now). They'd be treated as medium for purposes of bull rushes, grapples, and load (as they are now). So essentially, the only benefit they get out of it is to replace their racial bonus to attacks against orcs and goblins with a simple static bonus based on them being small.
So it makes sense to me. Quite honestly, with a little tweaking, you might be able to make dwarves MORE balanced. They could, of course, also be shorter (3'6" or thereabouts) rather than arbitrarily shoved to a 4' minimum by their size category. For instance, make them size small with powerful build, give them a DEX penalty to offset their CON bonus (AC penalty offset by size bonus), and a higher benefit to the appropriate craft checks (+4 rather than +2). You'd have to make your own call on their ability to move in Medium or Heavy armor without penalty or their extra benefit against being bull-rushed tripped. Personally, I think you could leave those abilities in place.
You could leave everything else intact. And you'd have dwarves that made sense. They'd be less likely to use missile weapons due to their dex penalty. But their small size would prevent it from hurting them too much in combat against most of their traditional foes. Except against goblins, which might explain why dwarves loathe them.
It also is more in keeping with the fantasy traditions for dwarves to be small.
My two cents.
