You need the axe from the Castle Treasury to win this one. When you get it, just sit there and attack the Dragon - his life force will measure on the arrow at the top of the screen. When he dies, you get a piece of the stained glass window (a "shard").

Note that when your characters hit 25th level, each gets a little friend - a falcon, a dragonfly, or a butterfly, depending on the character type.

Gauntlet Legends Walkthrough