Belladonna Took

[Lalaith]

If the two forms are identical, it's a likely coincidence

It's more of a likelihood than a coincidence, as Icelandic is the least changed of the Germanic languages and so probably most similar to proto-Germanic.
In Icelandic the verb is smjuga, the past participle is smaug.
I bow to your knowledge of Tolkien's letters Squatter, and I am ready to concur that Tolkien had the protoGermanic rather than Icelandic in mind.
As it's acknowledged that most of the dwarf names in the Hobbit are taken from the Icelandic Edda poems, I'll desist from trying to claim Smaug for Icelandic as well...