1) Talk to it and let it give you permission to release the woman, peacefully, and say that you'll return to kill it after.
2) The mage's gone away. Now, you must cast the Breach spell over the Dragon to remove its magic protection.
3) After that, cast Glitterdust to make the Dragon blind.
4) Now, the Dragon won't attack you until Glitterdust's effects ends, letting your warriors kill it.
To ensure the Dragon'll not attack you, use 2 Glitterdusts (not at the same time
)You can kill it faster if you're using that dragon's items (sword, shield, helmet)
Now that the Dragon is dead, you can bring it's scales to Cromwell and make an excellent full plate.
Enjoy.