If there's a winner of the "Most Influential Fantasy Novel You've Never Heard Of, Let Alone Read" award, odds are goods that it'd be The Worm Ouroboros. Published in 1922, this ground-breaking novel is the work of an English civil servant named E.R. Eddison. There certainly had been fantasy novels before, both in English and in other languages, but The Worm Ouroboros is the first one to turn world building into the high art it's become. J.R.R. Tolkien recognized this fact at the time, simultaneously praising Eddison's creation for its depth and criticizing it for its underlying philosophy. It's interesting to note that, like many fantasy authors, the world and story Eddison imagined grew out of childhood fancies that he kept with him his entire life.
The novel tells the story of the conflict between two realms, Demonland and Witchland. The king of Witchland demands that the lords of Demonland submit to his authority. The lords agree to do this only in the event that the Witchlander king can defeat the greatest of the Demonlander lords, Goldry Bluszco, in a wrestling match. When the two leaders undertake this feat of strength, the king of Witchland is slain. His successor contrives by magic to imprison Goldry Bluszco so that Demonland will have lost its champion and be vulnerable to attack by the invading Witchlander armies. The novel then proceeds with the story of the clash between these two kingdoms and the attempts by the Demonlanders to find and free Goldry Bluszco in time to be able to save their land from conquest.
The Worm Ouroboros is, quite simply, an amazing piece of work that defies easy categorization. With its unique prose style, it's quite unlike any fantasy novel that has come in its wake. Its characters are vividly drawn and compelling, even the villainous ones, who come across as very real, if flawed, human beings. The story itself reads like a Greek tragedy in the form of a Norse saga: a dark, larger-than-life struggle in which hubris plays as large a role as heroism and honor. It's this, I think, that so offended Tolkien. Eddison's characters, even the putatively noble ones, are arrogant brutes who adhere so thoroughly to a warrior ideal that they pray for the resurrection of their enemies so that they may avoid the boredom of peacetime. This is part of what makes the novel so compelling. The world it presents is at once attractive and repulsive, making it hard not to be drawn headlong into it, despite one's feelings.
Interestingly, The Worm Ouroboros is not listed in Appendix N. I'd be amazed if Gygax had never read the book, but, if he did, he never made mention of it, making it hard to gauge its direct influence over the development of D&D. There's no question that it had a huge influence on the game indirectly, through the world building template it laid down for the genre. It's a pity so many latter day fantasy novelists seem incapable of telling an epic story as succinctly as Eddison does (it's under 500 pages in its original edition), but I fear the fantasy novel is too deep into its decadent phase to allow for such a possibility. For that reason, if you're tired of 1000-page long, interminable series, you might want to give Eddison a try. His style certainly isn't for everyone and I admit that there are stretches of the novel where my eyes started to glaze over, but there's no denying his was at least a unique and imaginative voice and one of the founders of a modern literary genre.