Smaug calls Bilbo a thief, and he is accurate in his judgment.
Smaug : Underhill? Bilbo Baggins : ...and under hills and over hills my paths lead. And through the air! I am he who walks unseen!
In the conversation between Smaug and Bilbo, Bilbo calls him "Smaug the Tremendous", "Smaug the Chiefest and Greatest of Calamities", "Smaug the Mighty", "Smaug the Unassessably Wealthy", "Lord Smaug the Impenetrable" and "Your Magnificence", and later Bilbo refers to him as "Smaug the Terrible" and "Smaug the Dreadful ...
"My armour is like tenfold shields, my teeth are swords, my claws spears, the shock of my tail a thunderbolt, my wings a hurricane, and my breath death!" - The Hobbit, Ch. 12 'Inside Information'.
Although he cannot see Bilbo because of the ring, Smaug smells Bilbo and greets him mockingly. Bilbo is smart, though, and answers Smaug only in riddles, which amuses the dragon enough to quell his anger for a while.
Smaug calls Bilbo a thief, and he is accurate in his judgment.
And Smaug wants to find out where Bilbo is from, so he doesn't kill him outright. They fall into conversation. Smaug asks Bilbo's name. Bilbo doesn't want to give Smaug his name for fear of evil spells, but he also doesn't want to refuse Smaug's request for fear of angering the dragon (neither would we).
Bilbo is invisible because he is wearing his ring, but Smaug can smell him. They talk about the treasure-trove and the dwarves' intent to reclaim it. All the while, Bilbo is looking for Smaug's weak spot, which he finally spies near his left breast.
Peter Jackson certainly makes the assertion in the theatrical and extended editions of the Hobbit movies that Smaug and Sauron are not only well aware of each other, but are planning to ally with each other. Smaug even seems to have detailed knowledge of Sauron's coming plans.
He represents the wrongful impulse to hoard, to accumulate beyond what one can use and to refuse to share with others. In revenge for the theft of the Arkenstone, he destroys the town of Lake-town (Esgaroth).
Bilbo is terrified, but goes to confront Smaug because he wants to give the dwarves a chance to obtain the lives they deserve. Tiptoeing within the mountain, he starts his trek.
Bilbo, meanwhile, regrets calling himself “barrel-rider,” since this will cause Smaug to think of Lake-town and to attack it.
Dragons have always craved treasure. The “father of dragons,” Glaurung, sacked Nargothrond and gathered all the gold & jewels into a mound to sleep on. That was back in the First Age, so it's just an instinct/ desire they have. In later eras, the Dwarves accumulated substantial wealth that attracted dragons.
"My armour is like tenfold shields, my teeth are swords, my claws spears, the shock of my tail is a thunderbolt, my wings a hurricane, and my breath death!"
Smaug's ability to speak, the use of riddles, the element of betrayal, his enemy's communication via birds, and his weak spot could all have been inspired by the talking dragon Fafnir of the Völsunga saga. Shippey identified several points of similarity between Smaug and Fafnir.
Smaug was the last of the great dragons, thus ridding Sauron of a possible powerful ally. Beyond this, all the rest of the dragons in middle earth supposedly only lived far to the north; being now a lesser race, the logistics of bringing them to bear, particularly in the southern campaigns, would be unlikely.
So, one glimpse into Smaug's eyes and the Balrog falls under the spell. Even if it's just for a second—a moment of hesitation or distraction, it'd be enough. Smaug would snatch up Durin's Bane and gobble him up with his sword-sharp teeth (and we know swords can kill Balrogs).
He was only worried about finding the Ring, and he already had plenty of servants to do that for him. So, in short, the power that Sauron would have gained by recruiting the Balrog wasn't worth his time.
The bravest thing Bilbo does is to keep going into the dragon's lair. Alone in the tunnel, he begins to detect signs of Smaug's presence, but instead of stopping or turning around, he continues on, all the way to confront Smaug alone.
Smaug's dragon-fine would not have been hot enough to destroy the One Ring. The malevolence that Sauron put inside of the Ring could only be destroyed in the Cracks of Doom, so Frodo was compelled to make the journey to Mordor.
Gandalf absolutely could have killed Smaug in a one-on-one fight. The grey wizard fought and defeated the Balrog of Moria, and a dragon was a lesser evil than that.
In fact, Bilbo's possession of the Ring in particular was characterized by pity, as he encountered Gollum and saw what he had become. The compassion he shows to Gollum by not killing him could have been a large factor in why the Ring did not corrupt him the way it did other Ring-bearers.
Also, Cumberbatch's Smaug certainly seems like the type who would gloat at someone even when he knows they can't understand him. The only other person that the dragon speaks to, just before flying to Lake-town, is Thorin Oakenshield.
Although Smaug makes no appearance in Peter Jackson's The Lord of the Rings trilogy, he is indirectly mentioned by Gandalf during his conversation with Frodo near the beginning of the The Fellowship of the Ring.