My theory about the film...(SPOILERS)
I just watched this for the first time last night, and yes, at first I found it slightly baffling, but then I thought about it and I seem to have formed a reasonable theory explaining the climax of the film. And it's this:
Donald Sutherland died in the accident at the church. But given how resistant he is to death, the rest of the film is him coming to terms with it, and he does that by first coming to terms with the death of his daughter. Yes, he proclaims several times that his daughter is dead, but that doesn't change the fact that we haven't seen him grieve at all.
That's what the dwarf represents, it's his hopes of finding his daughter being dashed and realizing that she's gone, and only then accepting that he, too, is dead (by way of a knife to the throat, ouch).
Also, note that in the first half of the film, he seems to speak Italian fairly well, more than enough to get by, but after the accident, he begins asking everybody if they speak English, and he suddenly seems to possess only a handful of Italian words. It's him struggling to convince himself of something that he knows, deep down, isn't true.
And just after the accident when the girl is being pulled out of the water and he flashes on himself falling from the scaffolding, it's presented like a 'what if...' kind of thought, but it could be the memory of what actually happened pushing through.
It also explains why he has the psychic arrested. Seeing his wife and the sisters mourning scared him, and his subconscious probably knew to use the psychic as a way of convincing him that he's really dead. So he pushes her away to further avoid coming to terms with reality.
Anyway, that's my theory. It could be completely wrong, but given that this is an impressionistic film, it's open to interpretation, and this is my interpretation. What say you?
Does the space cold make your nipples go all pointy?