A couple of quick thoughts, based on your conversation about this story.
The people of Ib are described with green skin, bulging eyes, etc. Is this an early example of HPL fish/amphibious people motif, like Shadow Over Innsmouth? I agree that this is not one of the Dreamlands stories. I think it's a one-off that HPL did early in his career that touched on several things that he went back to in greater detail.
It also sounds like Brandon thinks the truth is out there, recorded on these cylinders and papyri. I recently did a re-watch of the X-Files as well.
I found the story here:
In case anyone wants to listen to this story, the Drabblecast just did a reading of it. Episode 454. I just listened to it on iTunes, or you can go to their website.
The people of Ib definitely evoked Deep Ones to me, although I don't think they're the same. As Brandon said, there's no hint of interbreeding here - although if one were to expand the story, you could easily include that as a reason for the Sarnathians hating Ib and wanting to destroy it.
I agree that this isn't a Dreamlands story. I always imagined it being set in a very ancient and purposefully vague location in the Middle East. But I didn't know about the real-world Sarnath, and after listening to the discussion I agree that it's probably meant to be set in India.
I also agree with you that it's an early one-off. There aren't any explicit links to the mythos that Lovecraft went on to create, but he did revisit some of these themes and ideas. For example, the Ibbians being stranded extraterrestrials who have stagnated on Earth are kind of similar to the Mi-Go in The Whisperer in Darkness.
By the way, the towers being " A full thousand cubits high" makes them about 1500 feet (at 18" to the cubit). Which would place them about 15th on the list of tallest modern buildings on Earth. For comparison, the Willis (formerly Sears) Tower is 1450 feet tall, and was the tallest building in the world the whole time I was growing up around Chicago.