When drawing the blue event card Paying the Price of Defiance the town of Tamalir is destroyed for the rest of the game.

What happens to the items that were for sale in Tamalir, are they discarded to the bottom of the Market cards or are they lost & destroyed forever.

No Item or Ally card is destroyed forever ("forever" is the current game duration). It is always discarded and to discard means to put the card at them bottom of the Market Deck (or in a separate pile, as it's quite impossible to wast the whole market deck in a single game). Dwarven Fire Bombs and other explosive Items are discarded when used, even if you destroy them to achieve the effect. I'll do the same with Tamalir market stack if this Event takes place.