The demon knight has a noticeable pattern. He will cast a dispel, followed by a fireball, and then a Power Word: Kill. Then he repeats the pattern. Occasionally he melee attacks between spells, but not too much.
The demon knight has a lot of magic resistance, and since you have no way of legally lowering it, you are going to have to kill him primarily by physical means.
Just send in one melee person, since every couple rounds the demon knight casts a fireball sending in a bunch of melee people will do more harm than good. So whoever you best tank with the best AC is should be sent in alone while everyone else hangs back with ranged weapons.
While acid arrows are usually regarding as the best arrows, the demon knight's huge magic resistance will resist the acid damage more often than not, so it is better to use arrows+2 instead for the additional THAC0.
Have your mages cast buffing spells like Haste on your archers, but don't worry about buffing your tank too much since the demon knight will dispel the tank every couple rounds, so any buffs are wasted on the tank.
Since you cannot buff your tank with Protection from Fire, it is better to equip a ring of fire protection or two (they stack) since that cannot be dispelled. With the rings equipped, the fireball won't damage your tank too terribly bad.
The biggest problem with the demon knight is his Power Word: Kill. This spell is very powerful in a low level campaign. If you have less than 60 hp, the spell kills you automatically with no saving throw allowed. If you have more than 60 hp, the spell has no effect at all. So the only real defense is to never let your hp drop below 60. A high level tank with good AC and fire protection won't have too much trouble with this, but definitely keep some healing potions handy in case he needs them. (Don't try to heal with a cleric since the cleric will have to get within range of the fireballs in order to heal the tank. You should have found tons of healing potions scattered throughout Durlag's tower, even some greater healing potions that heal 18 hp.)
The woman you talk to right before encountering the demon knight suggests to break the mirror to make the battle easier, but personally it makes the battle harder for me. Breaking the mirror doesn't make the demon knight weaker like it was suggested but instead summons some shadow creatures. I am not sure if this is a bug or what, but don't bother breaking the mirror.
i just got to the Durlag's Tower finale the other night (using SCS not vanilla.)
me and Minsc took out the demon knight in 6 rounds... just me and Minsc
EDIT- *possible Spoilers of ToSC below for TC*
now, Aec'Letec is another story. i didn't use cheese to off it, but it uses some repugnant cheese itself. the key to winning this fight without deaths is major buffs on saves, RoFAs and Dispel. Dispel or else a party member can get chunked when it rips through it's chest a la Aliens. the cultists have decent ACs, but the mage drops fast (as all BG1 mages tend to do when wailed on).
i wouldn't like to have an all-mage party in this SCS fight, though...
SCS seems to rely on spamming chaos, confusion and web. web in my opinion should not be as AoE or as long duration, or it should disable only the foe that the spider's wailing on. spiders are over-the-top in SCS so don't install that tactical component, but the rest seem fairly reasonable.