Request for an official response to clarify

[Viridiana]

It can mean anything from "she made common cause with" to "she literally had sexual relations with" (in which case I do believe the game uses the wrong term to begin with. "Lay down" should be "lie down," no?).

Lay is the past tense of lie, so to say she lay down with dragons would be the correct term. Everything about the presentation of it (in English, at least) makes it clear they're saying she had sex with a dragon. As you correctly note elsewhere in your post, though, that's only what the characters are saying, not necessarily the truth.

Edit: And, of course, the game is entirely silent as to whether there were offspring from the union. . .