Dwarves were a race in Middle-earth also called Khazad, the Naugrim, meaning Stunted People, and Gonnhirrim, meaning Masters of Stone.
The Dwarves were made by Aulë, whom they themselves call Mahal, meaning “maker.” Aulë was unwilling to wait for the coming of the Children of Ilúvatar, for he was impatient and desired to have someone to teach his lore and his crafts. Therefore, he made the first Seven Fathers of the Dwarves in secret in a hall under the mountains of Middle-earth.
It was, however, not within Aulë's power to create life. After being reprimanded by Ilúvatar and realizing his error, Aulë offered his creations to his father to do with as he would, including their destruction. Even as the offer was made, Ilúvatar accepted and gave the Dwarves a life of their own. So when Aulë picked up a great hammer to smite the Seven Fathers and destroy his presumptuous creations, they shrank back in fear and begged for mercy.
Ilúvatar was however not willing to suffer that the Dwarves should come before the Firstborn (Elves), and he decreed that the Seven Fathers should sleep underground and should not come forth until the Firstborn had awakened.