Drawing inspiration from Norse dwarves coming from maggots, I might give my dwarves a maggot-like larval form, multifaceted, jewel-like eyes, and beards which are really masses of antennae. The gnomes might (instead of being descended from xvarts) be beings made of living minerals, like tiny earth elementals with bits of jewels and ore sticking out of them. They use their natural illusion magic to disguise as more familiar forms when around other species. Maybe they were made by the dwarves as a slave race.