This is done by setting a host application and choosing Delphi 5 (delphi32.exe) itself as the host application. Theoretically very easy - available since Delphi 3.
But there are two catches:
It seems that
the DLL has to be in the same directory as its DPR file (in other words: don't have a separate output directory)
your project path should not contain dirctories with a space in the name. There seems to be a problem with debugging DLLs with spaces in the project path.
Happy debugging!