Babylon Main Quest Clarification (Spoiler)

Basically, Merlin trapped Tiamat in a dream of sorts and she gave Kingu the Grail. Kingu summoned Gorgon as a sort of temporary replacement for Tiamat and synchronized the two of them (Gorgon and the real Tiamat). This way, Gorgon would have Tiamat's ability to create the demonic beasts. When Gorgon died, Tiamat also 'died' since they were connected to one another. When Tiamat 'died', she woke up in the dream and then attacked the Merlin in the dream, which also affected him in the real world and eventually led to him dying.

Merlin's screw up is basically falling for Kingu's plan. Rather than delaying Tiamat's awakening by keeping her asleep, he ended up making her awaken sooner by failing to realize that killing Gorgon would awaken Tiamat.

Everything I say is merely my take on it, not established fact.
It is said that Merlin got Tiamat locked into some kind of cage (probably some incubus dream realm shenenigans) which wouldn't completely seal her, but at least postpone her arrival. Gorgon was a sychronized copy of Tiamat, and with her demise the lock on the cage was released. I assume the spell is automatically weakened/removed once the target is dead, and it interpreted Gorgon's demise as Tiamat's. Or the sychronization applied some kind of shock that would knock Tiamat out of her slumber. Once partly (?) free, Tiamat gained control of her dream and dealt with Merlin on that realm, which affected the him in Babylonia as well. I think the plan was just making Merlin drop his defenses by luring him into their territory and bringing his attention to anything but the dream realm (probably the battle with Kingu after Gorgon's death). It's likely that the process takes a bit of time and Merlin would have countermeasures if he wasn't distracted. Otherwise it would be enough to sacrifice Gorgon from the getgo.
Merlin on the other hand wanted to create a bit of breathing room for our group by helping to take out one of the major threats earlier, but made himself vulnerable in the process. He messed up and ended up accelerating the final showdown with Tiamat instead.