This is all about customising the views. You might like to have a look in the Wiki & documentation to see what sort of information there is. Presumably you've found your way into the Customise Views dialogs, and you can see that each view consists of a number of categories and items. You have to add/delete/edit/rearrange items as necessary to provide the structure you want. MC provides some views by default but you can customise them and create your own as necessary.
I take it that what you want is an A-Z listing of artists, then when you drill down into a particular letter you want to see a list of artists starting with that letter. Then when you pick an artist you then get a list of albums by that artist.
So your view scheme needs to consists of the following items in order, which define the drill-down structure:
Artist (Grouping by 1)
Artist
Album
It sounds like what you've done is simply edited the existing Artist item to add a grouping option to it, i.e.
Artist (Grouping by 1)
Album
That way, you will indeed get an A-Z listing followed immediately by an Album listing by all artists that begin with your chosen letter. You need to add an Artist level without the grouping in the middle. Or alternatively, you should have added an Artist grouping into the beginning of the list, rather than editing the existing Artist item.
The other slight complication is the difference between Artist and Album Artist! Depending on how you've tagged your music files, and whether you've got Various Artist compilation albums in your colelcction, you might want to use Album Artist (or Album Artist Auto) instead of Artist.
I can't help with the Now Playing question, I've never used it, I actually only use J River as a DLNA server for PlugPlayer. There are a separate set of views specific to the DLNA server but you set them up in the same way so that PlugPlayer presents menus to you in the way you want to see them.
