Does the Dragon’s special ability prevent paladins from healing the party?

Yes, it does. The party skips the entire Healing Step. However, it does not prevent wizards from casting the “Regeneration” spell, as spells are not part of the Healing Step.

(The icon description on page 19 incorrectly says “Priests will not heal anyone this round.” This should also apply to paladins. In later editions, this will be changed to “Skip the Healing Step this round.” )

When does the party heal?

As stated in the rules, the Healing Step is skipped if there was no attack in the Battle Phase this round.

This can happen if:

• You sent no monsters (or ghosts).
• You sent only Slime and used it to prevent conquering instead of to attack.
• You withdrew all your monsters because of a spell.
• You sent only monsters (or ghosts) that cannot attack (Vampire vs. priests only or Ghost vs. one adventurer).

(Or in any combination that leads to the states mentioned above.)

The Healing Step is also skipped as a result of these special effects:

• You hit a priest (not the paladin) with an Anti-magic Dart this round. (Note that the Anti-magic Dart can not prevent Healing if the party has a paladin and no priests.)
• Your Dragon attacked this round. (Dragons turned into sheep do not prevent Healing, but dragons affected by Blind Rage do prevent Healing.)

Except in the cases mentioned above, any attack by a monster (or ghost) will cause the party to heal during the Healing Step. You do not keep track of which damage was caused by what, so even the damage from traps or from previous rounds can be healed.

During Healing, you have to remove one Damage Counter for each heart symbol in the party. You always remove all damage from the first adventurers first, no matter when or from which source it was dealt.

Priests and paladins are healed the same as any other adventurers: when there are no wounded adventurers in front of them.