How does one defeat the megadragon??

(Your topic tile should be more specific.)

I haven't actually killed the Mega Dragon myself, but here are some strategies:

During the late game, I recommend giving most of the late game level bonuses to a fighter or barbarian, and getting items to allow them to use their high level to cast Day of Protection and either Day of Sorcery or Power Shield. Many shops will stock spell casting items, and they restock random items at the start of each (10-day) week. So, save on the last day of the week, enter the shop twice (each time takes a day), and the second time the shop will have new stock; if it doesn't have anything you want, either check other shops or reload and try again.

Before the fight, take advantage of the various fountains found throughout Xeen. In particular, the +50 level fountain is useful, as is the energy resistance fountain. You should wait until after using the level fountain to cast Day of Protection/Sorcery. Also, if possible, have your highest level character use items to cast those spells (you can replace Day of Sorcery with Levitate, and Day of Protection with Heroism + Holy Bonus); this lets you use the spells at a higher level (exception: having a level 256 or higher character cast those spells might not work so well due to integer overflow).

The dragon's attack is energy-based. When choosing equipment, you should favor energy resistance. Remember, since, like many enemies, the dragon's attack is not physical, AC is useless. Protection from Elements isn't useful, but Power Shield can still help (in fact, with enough energy resistance, there's a chance of reducing the damage to 0, which also means you can't be eradicated this turn.)

The best weapon to use, believe it or not, is the Xeen Slayer Sword. It has the property of ignoring the enemy's resistance, which is nice because the dragon has 90 physical resistance. If you are at a decent level and have Holy Bonus (from Day of Protection) active. Also, this weapon also has the nice property that it never breaks, even if the character gets eradicated. You can trade this weapon between characters without using up a turn, or you can use the "i lost it" cheat at the Clouds mirror to get more (but be aware that you can't drop or sell this weapon).

Early in the fight, anybody who knows Mass Distortion should use it; on a successful save, it cuts the dragon's HP in half (which could be over 30,000 damage). (On a failed save, it only does 5 damage.) Also, my understanding is that the Dragon Sleep spell can work on this dragon, though not nearly as well as it does on other Darkside dragons.

If your main attacker (most likely a fighter or barbarian) dies or gets eradicated, you can resurrect them or (especially if it happens early) just Mr. Wizard out and reload (why isn't reloading allowed during combat anyway?).

No.

It actually has something like 64,000 HP, IIRC. (You can check by casting Identify Monster once combat has started.)

It has 90 physical resistance and 100 resistance to all other elements. In my experience, 100 resistance doesn't seem to affect spells quite the way you would expect; while less effective, spells seem to work. Also, it only affects damage spells (status effect resistance and other saving throws are based off the enemy's index number in the monster list), and some spells have the physical element (Dancing Sword comes to mind). The one exception is enemies that have 100 resistance to everything (of which there's only one such enemy in WoX), which can only be harmed by weapons that ignore resistances (which, again, there's only one in WoX), and which spells don't work on (though I believe Identify Monster does work). (Note that 100 physical resistance does result in physical immunity, but that's not what were dealing with.)

Killing the dragon is not necessary; treat it like one of those optional superbosses (like Emerald/Ruby Weapon in Final Fantasy 7 or Omega/Shinryu in FF5, if you've played either game). Unlike in MM2, however, the Mega Dragon is meant to be killable; it's just not meant to be easy.

Thanx for all the help.. I believe killing the Mega Dragon is the only way to enter the Dragon tower.. Is this correct??

No, the Dragon Tower is in an entirely different spot.

You can enter Castle Alamar from the Darkside overworld; just explore that lava filled area. The castle is somewhere in there, and you don't need to find a key (which is how I'm able to go there early in the game).

By the way, while you're in the lava area, if you go to A1 and cast Time Distortion while facing north, it takes you someplace interesting (not the place you're looking for, but still a place worth going).

Also, if you really insist on taking the entrance from the sky road, it may be possible to sneak by the Mega Dragon; you just need to lure it away (and endure the breath attack in the process).

I have completed Clouds of and Dark side of Xeen.. I am trying to finish World of Xeen..
Now the Mega Dragon.. Magic does work sometimes.. Mass Distortion has worked the best..
63K hit points is what the identify monster spell says.. 12K is as close as I have gotten.. At this point Mega Dragon is in red!!
Thanx for A1 hint.. I will try it..

It took me to the Fountain of Resilience.. I have been using it for some time,, and It sure does help..

According to Let's Play World of Xeen, even if you sneak by, it won't help. "The door is locked. Scratched on the surface are some words: The Megadragon has the key!"

I have defeated megadragon with level 150 and spell that divide HP by two (i don't know his name in english).

Congrats!