The Princess and the Goblin
From the backpage of the Wordsworth Classics edition: George MacDonald's second novel for children is widely regarded as both his best children's story and one of the finest fantasy tales ever written. The Princess Irene lives in a castle on a mountain with her nurse Lootie, while in caves beneath live a race of ugly goblins with heads as hard as stone. The lines are drawn for a fantastic confrontation between the Princess, her great-great-grandmother and her intrepid friend Curdie on the one side, and the gnome-like goblins on the other. It is a thrilling battle of with which must prove fatal... for someone.
JRR Tolkien took his inspiration for "The Hobbit" from his early love of George MacDonald's timeless tale.