We know this is all the lizard's fault. If we kill him, maybe the situation will resolve itself.
First we have to lure it into the open, though.
Only Mysterious Sunbirds in Moonlight Forest can lay eggs. As soon as you exit the city gate, you should see Mysterious Sunbirds.
Please bring Unbroken Sunbird Eggs to Elder Bania at the Moonlight altar! Ask him to cast a spell that will draw out the lizard.