It's true that it's a red dragon, but it's kind of different in that unlike the other red dragons, this one is not immune to fire magic. Therefore, if you can get Malwick's wand (And be lucky enough to find a Recharge Item scroll at the magic shop,) you can pass the wand between your characters and keep pelting it with fireballs from it; eventually the dragon will fall.
One easy way to get Malwick's wand is to lure a dragonfly to him, let it kill him, then dispatch the dragonfly. Once he's dead, his wand is free for the taking, with no strings attached!
My most recent MM7 game, I did that, (LOTS of save games; when the wand disappeared, I just restored to the last one, and used the Recharge Item scroll, and kept going,) then kept mephistoring the dragon after I'd killed it; once I emerged from the cave, my characters all had some great armor and weapons (Even found a Ring Of Items, which gave an ID Item bonus of around 20!) Thus, the rest of the dragonflies, as well as the abandoned Temple Of the Moon, were a walk in the park in comparison. (Also, wiping out Sal Sharktooth and his goons was a piece of cake as well.)