Is this a bug or is there meant to be an invisible dragon that can attack you but can't be seen and only attacked using area of effect spells? It also seems to be unkillable.

I had this happen to me except it was a goblin something or other. It was invisible and nothing I did would kill it. I quit the game then reloaded and the goblin was then visible so I could kill it and proceed as normal. HTH :)

Thanks. I just ran past it in the end as it was right near the stairs down anyway. I did try throwing everything I had at it first >_<.

Oh, I ran into that guy too. I think there's a dragonkin next to a funny place in the level. If you use the right spell you can push or knock him away. Then he falls into that funny place and you can't see him anymore. It's like the deal where you kill a monster but you can't get the loot because it fell in an inacessible place. only, on this one, you can't see it either.

I reported it to torchlight support as a bug - they contacted me back SIX MONTHS LATER. ha ha ha ha ha.