Below are descriptions of some of the things that may have inspired dragon myths. It is important to realise that there is not a single correct answer to this question. Different things will have inspired different myths. Some myths may have been inspired by a mixture of things. Click on the thumbnail pictures to see a larger version and picture description.

Alligators Birds Crocodiles Cryptids and New Species Dinosaurs and Bones

Instinctive Fears Pterosaurs Snakes Troglobytes Weather

Alligators
See Crocodiles.

Birds
Some dragons have bird-like attributes such as feathers and raptor talons. Some dragons are called birds in the native language of the storytellers due to their bird-like features. Two examples of this are the Piasa and Anzu.
It is possible that in the past exotic birds were mistaken for dragons. As people had not seen such creatures before, they could well be misinterpreted as some some kind of mystical creature. A fair number of medieval dragons had roundals on them, like a peacock's tail. Peacocks were exotic and unfamiliar to common people at the time.
Alternatively a familiar bird may be seen so briefly, that it is misidentified. One possible origin of Toltec/Aztec feathered serpent myths (such as Quetzalcoatl) is the Resplendent Quetzal (Pharomachrus mocinno). This bird has extremely long tail covers, which can make it look a bit like a flying serpent, especially combined with its striking metallic green colour. To give an idea of the length of the tail covers, an average bird is 35cm long and its tail covers 60cm (note that the tail covers are not part of the tail).
Other Dragon Stone Pages: Alchemy - Quetzalcoatl; South American Dragons - Quetzalcoatl; African Dragons - Anzu; North American Dragons - Piasa

Crocodiles and Alligators

The crocodile's size and potential ferocity make it likely candidate for inspiring dragon myths (of the dragon eating people variety). Usually crocodiles don't cause too many problems. However, in areas where they are used to eating humans (such as prisoners being fed to them or dead bodies thrown in the water) they become far more likely to attack and kill. Alligators are generally more passive than crocodiles. They rarely attack unless provoked. Most modern attacks happen when an alligator mistakes a human for prey, though the human often fights back, and the alligator retreats. It is possible that the Biblical dragon Leviathan was suppose to look like a giant crocodile (though the exact nature of Leviathan is not known). There are various cases of the skin of a slain dragon being kept as a trophy, which turn out to be crocodile skin, such as the Brno dragon. Other Dragon Stone Pages: African Dragons - Leviathan; European Dragons - Brno Dragon

Cryptids and New Species
A cryptid is a creature studied in cryptozoology. It is something that there are accounts and sightings for, but no proof has been found that it is real. This could be an animal only known from mythology and sightings, or a animal thought to be extinct. A dragon is an example of a cryptid. People have reported seeing them, but there is no scientific evidence to prove they exist. A famous example of a past cryptid is the giant squid, which has now been proven to be a real animal.
Areas where humans have difficulty exploring are the most likely places to find new species. The swamps of West Africa have a number of giant reptile myths. It has been suggested that the Babylonian musrussu dragon was inspired by creatures in this swamp. Robert Koldeway, the German archeologist who discovered the Ishtar gates, felt that the musrussu was a real animal. This was based on the lack of change in how it was drawn over the centuaries. Modern researchers have also tried to explore the West African myths in more detail. A trip in 2006 by Richard Freeman went to track down the ninki-nanka. The conclusion was that the creature seemed more folkloric than real, due to the local accounts of the creature having no consistency.
The deep sea is another possibility. This is where the giant squid was found, and is an ideal place for a giant animal to hide. Sightings of 'sea monsters' are still reported today.
There are other inaccessible mountains, jungles, and similar locations, which could hide an unknown species. Possibly in the future as more species are discovered, other origins of dragon myths will become clear. A new species is unlikely to be a dragon as people imagine them, but could well be something that would inspire stories from brief encounters.
Other Dragon Stone Pages: African Dragons - Musrussu; Sea Serpent Sightings; News: Gambia Dragon Hunt

Dinosaurs and Bones

The belief that fossilisd bones were dragon bones used to be widespread. It is still believed in some parts of the world, such as in China where the dragon bones are ground up to use in natural remedies. These bones can be from dinosaurs, but can also be from other prehistoric animals. In the past, fossil bones were not reconstructed in the same way as they are today. This does not mean that people did not analyse them. Some people in the past may have realised they were looking at a reptile (by tooth structure or similar) and some other features of the animal, such as its size. What they would not have is a complete idea of what the animal looked like. The complete animal would have been based around animals that were living locally. The bones would not form a dragon myth on their own. There have been examples of extinct animal remains being kept as dragon parts in other parts of the world. The skull of the dragon Old Ben turned out to be an ichthyosaurus skull. Non-reptile bones can also be mistaken. The skull of the lindworm killed in Klagenfurt was actually from an extinct woolly rhinoceros. This demonstrates that though some people may have an understanding of what they have found, others do not... leading to people being happy to accept that a mammal skull was from a reptillian dragon. There are various modern pieces of folklore about dinosaurs, and similar species, still being alive. Two examples are the Loch Ness Monster of Scotland and the mokele mbembe of Africa. There is no scientific evidence to support that these creatures have survived, but that has not stopped it creating a great deal of interest among the public. The public imagination of giant reptiles and monsters has been exploited by some people in the form of hoaxes, particularly for high profile creatures such as the Loch Ness Monster. Hoaxes are not always centered around finding a living creature. In 1845, Albert Koch claimed to have found the fossil ancestor of sea serpents (the Hydrarchos). It was quickly uncovered as a hoax, as the skeleton was made up from several fossilised whale skeletons. Other Dragon Stone Pages: European Dragons - Old Ben; Klagenfurt Lindworm; Sea Serpent Sightings - Nessie; Hydrarchos

Instinctive Fears

One dragon myth idea is that humans have built-in fears of dangerous animals, evolved as a survival mechanism. With a bit of human imagination added, these fears become dragons. One theory suggested that humans still retain a fear of dinosaurs from the days of the early mammal ancestors. An issue with this idea is that modern humans do not seem to be afraid of dinosaurs at all. If this fear was that hard-coded into the human brain, some sort of apprehension at the picture of a dinosaur would be expected. Another theory suggests that dragons are a composite of all the predator groups that early primates feared. The main groups are big cats, birds of prey and reptiles. David Jones popularised this idea with his book 'An Instinct for Dragons', using examples of people in areas too cold for reptiles who have reptilian monsters. This has been criticised, mainly due to the lack of evidence that humans have any sort of fear of certain animals built into their brain. An alternative version of these sorts of theories is that humans learn to fear things which are dangerous. People in many areas are threatened by, or compete with, these sorts of predators. Overall, it seems like the latter idea is more plausible. Humans will naturally become fearful of the dangers they face everyday. Once a story has been created it could survive for a long time and be taken with human cultures as they migrate. This would explain why some cultures have monsters that look like animals that do not live locally.

Pterosaurs

Pterosaurs were winged reptiles, existing from the late Triassic to the late Cretaceous eras. Their wings consisted of wing membranes attached to an elongated fourth finger bone. The other fingers formed a hand at the main wing joint. It is generally considered that pterosaurs had powered flight rather than gliding. They came in a variety of forms, with many different head shapes, crests and coverings. Some appear to have been covered in fur, which would imply they may have been warm-blooded. Early pterosaurs were less specialised and tended to have teeth and long tails. Some pterosaurs with long tails have a extra vane at the end of their tale (looking a bit like a tail spade - a common feature in dragons). Adding in the long neck and head of a pterosaur, their fossils do have a dragon-like look to them. A good example of a classic early type is the genus Rhamphorhynchus (Jurassic era), which had diamond-shaped tail vanes, long tails and teeth. Though Rhamphorhynchus does look dragon-like, it is also fairly small. This was not true of all pterosaurs. The largest known is Quetzalcoatlus, named after the Aztec winged-serpent. It had a wingspan of about 40 feet (12 meters). Later species of pterosaur, like this one, tended to lack the long tail and teeth. Even so, finding any part of a fossil of one of these could certainly inspire some winged monster stories.

Snakes

Snakes are an obvious inspiration for dragon myths. Many dragons take the form of large serpents. There are a number of ways that snakes may have had an influence. The keeping of house serpents is a tradition that was particularly common in Europe. These serpents would be a local species of snake, usually fairly small and not too venemous. They would be encouraged to live in the home. Many house serpents were given supernatural associations. They might be sacred to a certain god for example. It is only a small step onwards for myths about these snakes to become more elaborate. Some house serpents stories have them growing to huge sizes, being able to speak or turning into human form. At this point the stories match many dragon stories and would be judged as such on their own. The only thing to set them apart is that we know that the story comes from a species of ordinary snake. It is easy to see how in time the origin of the story would be forgotten and only a dragon myth would remain. Wild snakes are also good candidates for stories. Reticulated pythons (Python reticulatus) can grow to sizes of about 33 feet long. They are also known for being good swimmers, sometimes using the water as a place to ambush their prey from. A chance encounter with a snake of this size would generate some stories. Some of the smaller snakes would seem bizarre if they were found. A few species of snake have a false head on their tail as a defence mechanism. This could easily explain the double-headed serpents of mythology. Very rarely a snake from a normal snake species will have two proper heads at the head end. Snakes born like this do not usually survive for long in the wild, but would certainly be a find to inspire tales. Flying serpents are not something only found in mythology. There is a genus of snake that seems to fly. Chrysopelea, the flying snakes, can glide for long distances. The Paradise Tree Snake, Chrysopelea paradisii, can glide for distances of about 69 feet from a 30 feet high start (tests by John Socha). They do this by flattening themselves as they glide. They can control their glide by wriggling, as they do when they are on the ground. One of these snakes seen as a fleeting glimpse in the trees would be a very plausible serpent-dragon. They are found in south and south-east Asia. Other Dragon Stone Pages: European Dragons - House Serpents

Troglobytes
A troglobyte is a creature that lives in caves. They are so dependent on the caves that they cannot survive outside of them. These animals often look very strange compared to surface animals. Examples include having no pigment (being colourless) and not having eyes. It is not a surprise that these animals can be mistaken for something mythical.
There are not many vertebrate troglobytes, but a notable example from the dragon point of view is found in Slovenia. Sometimes when it rained, troglobyte salamanders would be washed out of the caves. The local people assumed that these were dragon larvae, proving that dragons existed. The true nature of the creatures was discovered later, once the caves had been properly explored.
This is an isolated example, so does not explain dragon myths everywhere. It does show how sometimes myths can be inspired by something specific to an area.

Weather
There are many cases of weather being attributed to dragons. Lightning strikes are sometimes considered to be produced by dragons. With the dragon of Kinabalu in Borneo, the weather on the mountain top was taken as an indication of the dragon's mood. In China, some dragons are though to control the amount of rainfall. People in the past saw a complex phenomena they could not explain (the weather) and came up with reasons for it happening. In times when weather could not be described scientifically, the idea that some sort of fabulous creature caused weather effects would have seemed quite plausible.
One of the reasons for this is the shapes and behaviours of the weather effects. Something as simple as a cloud can look very different in a storm, writhing and moving like a living thing.
Other Dragon Stone Pages: Asian Dragons - Dragon Kings; Kinabalu, the dragon of; Vitra