Is this your first time through the game? If so, you shouldn't fight the dragon. You can get past it one of two ways. You can either go under or over the bridge. If you decide to go over, just wait on the other side from where you come up the staircase (behind the wall. the flames won't get you). Eventually the dragon will hop down, when he does, run past him and into the building. Don't immediately light the bonfire though. Leave out the side of the building until the dragon flies away.
If you're familiar with the game and do actually want to kill the dragon now for whatever reason, then my bad, carry on! haha --- http://www.youtube.com/user/BottomsGaming?feature=guide