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Scenario:

In a combat, my TH-wielding chapter master instakills a 2-wound librarian that had joined a squad of 5 marines with no vet srgt.

The chapter master receives no wound.

The marine squad must take a Morale test, do they test on Ld7 because they suffered 1 casualty? or on Ld6 because they lost 2 wounds?

LD6, for they lost two wounds.

Instant Death caused the Librarian to lose all his two wounds at once, but it is still two wounds.

That's what I thought. Thanks.

Though it is not directly stated the best general rule is to count the wounds lost as opposed the the wounds dealt. In the case of instant death like this the wounds dealt will be less than the wounds lost and therefore the number that counts toward combat resolution. In the case of a challenge the wounds dealt may be more than the actual wounds lost. So it's generally easiest just to count the lost wounds as that is the only number that matters (outside of possible narrative)

Abandon: It actually is directly stated;
Page 26, Determine Assault Results, third paragraph, last sentence (in brackets).