I have been reading Le Morte D'Arthur and have also been getting into Dungeons and Dragons recently. I was curious why the figureheads of the Satanic Panic during the 1980s related the stories of fantastic heroes in a medieval setting hunting dragons and going on great quests with the worship of Satan rather than the stories of the Knights of the Round Table. As I thought about it more I also became curious about how the nuance between good and evil sorcerers in the stories became ignored during witch trials, where it seems to have been assumed that anyone who is accused of sorcery was in league with Satan.
I have an answer to an earlier question along the same lines (one of my favorites!):
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Lancelot is the great tragic hero of the Middle Ages--the Knight of Hearts, defined by his love for the woman he can never permanently have. Gawain is the chivalric warrior par excellence, the greatest knight of the Round Table. And yet, in the early 13C Quest of the Holy Grail, one volume of the cycle that basically codifies the 'full' story of King Arthur and his knights, Lancelot spends the whole book doing penance for his adultery, spiritually divorcing himself from his defining characteristic, and still doesn't truly reach the Grail. Gawain doesn't have any opportunities to prove himself worthy. No, boring AF Galahad, Perceval, and Bors plod through their quest and receive the Grail-vision victory. Court-based "Fanfction" writers all over Europe take Gawain off on his own riotous adventures of ladies and war--while the rewrite and consolidation of the overarching tale works even harder to make everything a Christianized spiritual quest. Thomas Malory in the 15C, of course, will have none of this, thus reifying Lancelot and Guinevere's romance as the beating heart of Camelot.
The point is, western medieval Europe loved Arthur and his knights, and so the stories mattered. Because they mattered, people fought over them--both in and out of the texts. The presentation of Merlin throughout later medieval Arthuriana is a fantastic illustration of the tensions in play amidst changing social ideals of order, purity, and Christian orthodoxy.
Merlin has both an in-universe and meta-literary backstory when Geoffrey of Monmouth drops him into his rough outline of the Arthurian saga in the 12th century. Geoffs had a bit of an obsession with the legendary wild man who evidently walked around spewing prophecy to anyone with a pen, in fact--he translated a book of prophecies attributed to Merlin from Welsh into Latin before composing the Historia, and followed it up with a separate biography of just Merlin.
Geoffrey's new and improved backstory for Merlin already starts to show some of the tensions over supernatural power acting in the world. He borrows part of a biography of yet another legendary character--and then twists it completely. Instead of being a teenager with an unknown father (who turns out to be an ordinary Roman), Geoffs lets one character interview another as to Merlin's parentage. Merlin's mother implies the father was some sort of spirit in the shape of a young man, and Vortigern's advisor-sorcerers generally agree it was a demon. This is hearsay, this is supposition, it allows Geoffrey to avoid the question of the relationship between his prophet and magic, his prophet and demons.
Merlin's magic or "magic" in the Historia is equally ambivalent. Geoffs certainly implies it--or does he? Are Merlin's "contrivances" that enable him to move Stonehenge all by himself, 'merely' physical? How closely were "medicines" tied to supernatural rather than natural power in the 12th century imagination? Is Merlin transforming Uther into Gorlois, or just giving him really good makeup advice? And--is the apparent ambiguity to us simply a modern imposition on a 12C worldview that didn't differentiate?
The popularity of Merlin beyond the developing Arthur tale, and the evident popularity of the character within it, made a serious impact on late 12C and early 13C readers. The first group I'll discuss is, like Geoffs, the scholarly-ecclesiastical elite: Latinate churchmen, at the forefront of crystallizing orthodoxy and stamping out what they label heresy (at this point: basically anything seen to threaten Church power; heretical "belief" is kind of a wash in an era where the bishop agreed to let the demon-possessed lady keep preaching and shouting in church until Hildegard of Bingen could get there to perform the exorcism).
You might think that, with the Church doubling down on Church-ifying and controlling lay belief from the late 12C on, clerics would frown on Merlin and vernacular writers composing romances for the laity would know what sells. Well, as Facebook might say, it's complicated.
Perpetual crankypants John of Salisbury made little secret of his distaste for Merlin. John differentiated between contemporary, chosen-by-God prophets like Hildegard and Elisabeth of Schonau on one hand, and misguided diviners (that is, those who sought supernatural knowledge by themselves) of "futile/worthless authority" whose false prophetic powers came from demons. But when John criticized Merlin explicitly, he did so in response to a colleague who had cited him authoritatively.
Around the turn of the 13th century, William of Newburgh had even harsher words about Merlin. Writing passionately that no true words can come from the devil, which is Merlin's source even according to Geoffrey (in Will's account), the Augustinian jeers:
It is plain that whatever things [Geoffrey] published, writing about Merlin, are lies, made up to gratify the curiosity of those without prudence/virtue.
Around the same time, however, Gerald of Wales thoughtfully placed Merlin's Welsh-pagan roots in the context of the current fad towards Christianizing classical pagan texts and ideas (a time-honored medieval obsession). Gerald pointed out that, for example. pre-Jesus seers like the Sibyl nevertheless prophesied his birth (...roll with it). Orderic Vitalis had gone even further, pointing out that some of Merlin's prophecies had been fulfilled and more would be! God speaks through his saints; surely he has the power to speak through others even in the contemporary world. Still, Gerald must be cagey:
...By what spirit such prophecies are made possible, I do not necessarily say that it is demoniac.
Through the twelfth century, the general idea of "King Arthur" and the Round Table knights grew into a gelatinous, disorganized blob. Around 1200, authors with a keen eye towards what was popular with readers started to work to change that. Among the most important, certainly of those whose (probable) name survives, was one Robert de Boron. Robert is probably best known for weaving the Grail into Arthurian legend not as a mysterious floating dish but as the Holy Chalice/Holy Grail brough to England by Joseph of Arimathea--in other words, a lot of the responsibility for the Christianization of Camelot's questing is on his shoulders. And, or maybe and yet?, his other major passion (at least, to surviving text appearances) was Merlin.
You may be interested in this recent thread and what /u/Platypuskeeper had to say there. I also linked to relevant entries in the FAQ, which includes this answer about King Arthur by /u/Whoosier.