I could definitely see certain types of possession causing damage (physical and mental, temporary or permanent) to our dwarfs.
I wonder if possession will ever be linked directly to Powers? That by itself could make those types of moods wildly more interesting and deep, making each possession unique, and possibly affecting the nature of artifacts made while under those moods, as well as having unique effects on our dwarfs.
Maybe once a Power gets "into" a dwarf it likes, it might come back. Possibly-once the Magic Arc gets here-being possessed by a Power (or more than one?) could grant magical abilities, perhaps at a physical and mental price for allowing the Power(s?) back in.
Possession might involve "switching" the dwarf's soul, for the soul of a Power. That act might just put the dwarf's soul in stasis (it can wander the "afterlife", or wherever that particular Power lives, while the Power's possessing the body. In the meantime, the soul might perhaps heal itself of any damage, or the soul might learn new things-either regular information, or maybe even magic), or it might put the dwarf's soul at risk. Such an act might by itself even alter, or harm (temporarily or permanently), the dwarf's very soul.
For that matter, I wonder if the "spirits of the dead" could, themselves, ever become Powers? Ancestor worship seems very "dwarfy" to me.