If a person attacks with 2 character, 1 deadly, and i defend with 1 character, I then use a card to kill a participating character, choosing their deadly, will i still have to lose a character to deadly...or does the deadly character have to be in play when the challenge resolves

Deadly isn't resolved until the challenge resolves. If the character with Deadly doesn't make it to the end challenge - for any reason - it will not be around for the resolution of Deadly.

The challenge doesn't "remember" any character participation that changes before the challenge resolves. Nothing "counts" until the total challenge STR is counted and compared.