I don't know who to enter into the tournament... I'd like to put up Sargon, the knight from Blade of Darkness, at a point just before the game's completion. There's no specific link for information on him, so you can use this post instead.
At this point in the game, Sargon will have the Sword of Ianna, the two elemental swords (Ice and Fire) maybe the Queen's Sword, plus a set of plate armor and a few sturdy shields. He'll also have a few healing potions.
The Sword of Ianna is a very powerful weapon in melee combat, but is also capable of creating a cutting wave of energy that hits targets at moderate distances.
The swords of Ice and Fire are pretty much exactly what they're named, with no outstanding qualities beyond the immediately apparent (freezing and burning).
The Queen's Sword is a normal weapon unless its special attack is used, in which case it restores as much life to the wielder as it deals damage to the victim.
The armor is a standard set of steel plate mail.
The shields are also fairly mundane.
The potions provide instant healing in-game, but for the purposes of the challenge they'll only provide rapid regeneration and prevent blood loss.
Sargon is a master swordsman (of course), and is quite tough in game terms, capable of surviving a series of attacks by a greater demon. He's a perfectly normal human otherwise, with moderate agility and perhaps above-average strength.
As for the proposed rules, I'd like to amend the part where a character can challenge another on a lower level - the point of the suggestion was to allow a character to increase his level by winning against a possibly stronger enemy, not to boost himself off of a weaker one.