Ah, the Dragon. You'll come to love this guy, I imagine. After killing him for the 500th time you'll see what I mean. =p
Anyway, here's what he does... First, he says hello!

OK, OK, I'm in a corny mood. Now he'll walk towards you, and after several steps, breath fire.

It's a good idea to run towards him and attack his feet, so you don't get burnt by the flames. Once you hit him enough, he'll fall down. Don't let him sit on you, as it's (1) Rather painful and (2) Very embarassing to be killed by having a dragon sit on you. =) Once he falls over, attack his head, as it has the lowest defense of any part of his body. If you don't do enough damage at this point, or you don't get him to fall over at all, he'll fly up into the air and breath fire on the ground. The first blast will be aimed rather far away from his position, so get right under him. The second hits almost right under him, so move behind. Be careful of his landing, if you're too close you'll get smashed. Once he lands, attack again. Lather, rinse, repeat, until you get to stage 2...

Now the dragon will roar...

And he'll fly up into the air. This time he won't bother spitting fire, he'll burrow into the ground.

He's rather flexible for a dragon, isn't he? Now he'll burrow underground and try to attack you. There are 2 ways to avoid this.

Number 1: Stand right on the edge of one of the lava pits he creates when he burrows. If you stand in just the right spot, he can't hit you because he must dive deeper underground when he reaches a lava pit.

Number 2: Run around the perimiter of the arena. This is probably the most effective means of avoiding his attacks. Just keep running around the edge (in the same direction, of course) circling around until he pops up out of the ground. (He will come back up after the 3rd dash). Now he'll walk around a bit, if you stay behind him he's less likely to lift off again. Keep attacking his feet with a multi-hit weapon if you have one, or shoot his head with a gun. After a while he'll breathe fire again, and lift off to burrow once more. Keep repeating the last few steps until he's dead.

Weak to: Ice, Light