This article is from the Tolkien Newsgroups FAQ, by Steuard Jensen sbjensen@midway.uchicago.edu with numerous contributions by others.
Sauron almost certainly knew of the Balrog, at least through his
Orcs and very possibly more directly. The Dwarves knew that "Durin's
Bane" was still in Moria when Dain saw it inside the gate at the battle
of Azanulbizar, but they may not have known what it was: at the Council
of Elrond, Gloin calls it simply "the nameless fear."
In "Lothlorien", Celeborn tells the Fellowship, "We long have feared
that under Caradhras a terror slept." This indicates that he wasn't
sure anything was there, and suggests that he did not know the nature
of the "terror". Similarly, in "The Bridge of Khazad-dum", Gandalf
clearly does not know what to expect: after confronting the Balrog
through the door of the Chamber of Mazarbul, he says, "what it was I
cannot guess". When the company finally sees it, he says, "A Balrog.
Now I understand." If neither Gandalf nor Celeborn knew of its
presence, it seems unlikely that any of the White Council did.
 
Continue to: