This quest is given to you by the Vodyanoi Priest when chapter 4 is started - on the Lakeside - when you talk with him and agree to pray for the Lady of the Lake. You need to talk with the other witcher in the crypt.
The monster itself, being a deity, cannot be killed by direct attacks (as can be read in your bestiary). However, it's followers can be killed, which is exactly what you should try to do to defeat Dagon.
To be continued.