The entrance to LEGO City is located outside the Cantina, on a stretch of wall near the entrance closest to Episode VI. It requires 60 Gold Bricks to get into.
This stage is played in Free Play, allowing you to select any character. It is useful, as you will need a variety of abilities to get the Million Studs required.
In general, smash and destroy basically everything. If you can flip a lever for something, do it. If you can Force something, do it. If you can ride a vehicle or animal, do it. Basically everything here will give you Studs in some way or another. Thankfully, you automatically get the Studs for the things you smash, Force etc. So you have no need to actually pick up any Studs. Generally, you'll end up finding yourself at about 970,000 Studs after smashing basically everything. Generally, you'll have missed something somewhere. The easiest way to attack this stage is to do a sweeping method, head across the stage, doing everything you can in an area before moving on. Final note: the large forceable objects near the back of the Stage need to be Forced to spell out LEGO.