... you don't face a balrog in person in the game. The developers take their lore at least somewhat seriously. I think, from what I've hard, that there is an instance in the game that lets you revisit some past battle with a balrog, not necessarily the same one from the book, taking on the role of ancient heroes or something. As far as I know, your own characters don't get to take on something like that. I'm pretty sure they're passing through Moria after the Fellowship, working with dwarves and the elves of Lothlorien to attempt to reclaim it from the orcs and goblins and other things that dwell there. The balrog has already been removed from the arena by Gandalf.

The game uses a hope and dread mechanic that's actually pretty neat. Enemies of certain types and powers and infamy will cause dread in your character, causing him/her to cower, health to lower, and the edges of the screen to actually grow quite visibly darker. The only way to counter this is hope, which is given off by some npcs (Aragorn, Gandalf, Elrond, Tom Bombadil), and by certain legendary armor and weapons from previous ages. If you approach the legions of the dark without proper hope, you are doomed to fail.

For instance, in the lower levels I came within somewhat close proximity of the Witch-King. Before I could even see him my character was struck with Dread that lowered my health and made the edges of my screen grow dim. When I got close enough that he turned his gaze on me, I, the lowly level 20 character, was paralyzed with fear, unable to move, as my screen actually went white.

So far the only real lore-breaking thing I've come across is in a couple of the classes, which don't technically use magic like Gandalf, they use other non-magic systems, but they produce things that are an awful lot like magic.

They neatly get around magic in the healing system though. You don't actually have health, you have morale, and you lose if it's reduced to zero. A minstrel restores morale by playing songs during battle.

Sorry, that was very likely more than you cared to hear. I just like the game a lot.