How did they get in the city when the Drow matron mother sealed it off??
Perhaps Giles knows a ward-bypassing ritual?
I was tempted to exclude Ust Natha from the paladin-attack-places, but there are a large number of areas in it and I would have to list them all individually. That's low-priority for me.
The reputation fall from killing those paladins were a bit harsh (-4 rep per kill!) . . . after that fight I had 1 rep point.
Yes, that's the point.
I don't see why killing a few paladins in front of drows could lower your reputation.
I agree, BG2's reputation system is non-sensical. In fact, I believe that everyone here agrees with you.
Killing a peasant in a deserted room away from prying eyes should not lower your reputation. Unfortunately, they made the critical design mistake of linking "what people think of you" and "your morality" (e.g., both store prices and paladinhood depend on reputation). There's no excuse for that, but it's a BG2 bug.
Think of the rep loss for killing the paladins as an indication that you have taken an evil path (and you have). It's a game bug that it is linked to public perception.