If the PC is completely surrounded in the WDC, it will produce an odd behaviour:

You will get the threat from the dragon and the prompt asking if you want to pick up the item. If you say yes to pick up the item, but there is no room for the dragon to teleport next to you, then nothing happens. You don't pick up the item, and no reason is indicated why you couldn't/didn't pick up the item. Moreover, the dragon isn't hostile later. One turn does pass, though.

How to reproduce:

-Drop an item in the WDC.
-Stand on the item and use a wand of door creation to create doors to block all accessible squares. Close the doors.
-Pick up the item and say yes. Nothing happens here.

Suggested remedies:

-Allow the PC to pick up the item, and the dragon becomes hostile but does not teleport right away (with a message "You hear a distant howl of fury" or something).
-Allow the PC to pick up the item, and the dragon teleports to the nearest available square to the PC with a similar mesage
-Disallow the PC from picking up the item, but include a message indicating why you weren't able to do so.