The Dark Eidolon and Other Stories, a new anthology of Clark Ashton Smith's short stories, prose poems and poetry. It's edited by S.T. Joshi, a Lovecraft scholar who has managed to convince Penguin to put out all kinds of weird fiction lately. Joshi's Amazon page is like a wish-list of weird fantasy tales.
The first story in The Dark Eidolon is "The Tale of Satampra Zeiros", a short romp in the Hyperborean cycle where two disreputable types go to the ruins of Commoriom in search of treasure. It seems pretty undeniable to me that this is the kind of story that D&D is made of, even if CAS didn't make Appendix N.
Anyway, if you haven't, you should read the Satampra story. Mostly because it's a damn good yarn, but also because it's essential to my point here.
The thing in the basin is a great example of how an encounter should be able to go in a D&D game. PCs need to be able to run like hell, which seems to be missing from a lot of players' mindsets and editions of D&D. If you're going to have bona fide monsters in the game, it stands to reason that they should be able to have the kind of response that the thing coming out of the basin has on Satampra Zeiros and Tirouv Ompallios.
It's a terribly unbalanced encounter, but clever player characters could have handled it otherwise. Not being drunk would be a start, as would a better plan of retreat. Some kind of alternative plan for the creature – fire, oil, throwing food or a corpse at it, pretty much any desperate move, or retreat and research as to its capabilities – could prevent a TPK, but if they stood and fought they'd both be dead.
To me, that's why save-or-die mechanics are a good thing in old school RPGs. Without them, you can't create that sense of visceral terror that we see in Satampra's tale. A careful referee could manage, although not with CAS's unique style, to create something quite parallel in the players as they face an unknown horror.
Of course, not every encounter should be like this one. CAS is unforgivably stingy with the treasure, for one thing. And there should be a time when it's appropriate to the PCs to stand and fight. But combat should generally be at the PCs' choosing, not in carefully arranged set-pieces. You fight when you think you can win, and you shouldn't always think that.
For me, it's very important that the dungeon is dangerous. If it weren't, someone would have already looted it and there'd be nothing left for the PCs to get. Encounters like the one faced by Satampra Zeiros and Tirouv Ompallios are one of the ways to make sure of that.