How layout is rendered in magento
devm.com.np
<?php 
public function viewAction()
{
    $this->loadLayout();
    $this->renderLayout();        
}

//Mage_Core_Controller_Varien_Action
public function loadLayout()
{
    // add default layout handles for this action
    $this->addActionLayoutHandles();
    $this->loadLayoutUpdates();
    $this->generateLayoutXml();
    $this->generateLayoutBlocks();
}

public function addActionLayoutHandles()
{
    //$this->getLayout() is singleton

    $update = $this->getLayout()->getUpdate();

    // load action handle
    $update->addHandle(strtolower($this->getFullActionName()));
}

public function loadLayoutUpdates()
{
    $this->getLayout()->getUpdate()->load();
}

//Mage_Core_Model_Layout_Update
public function load($handles=array())
{
    foreach ($this->getHandles() as $handle) {
        $this->merge($handle);
    }

    $this->saveCache();
}

public function merge($handle)
{
    $this->fetchPackageLayoutUpdates($handle);
}

public function fetchPackageLayoutUpdates($handle)
{
    $this->fetchFileLayoutUpdates();

    foreach ($this->_packageLayout->$handle as $updateXml) {
        $this->fetchRecursiveUpdates($updateXml);
        $this->addUpdate($updateXml->innerXml());
    }
}

public function fetchFileLayoutUpdates()
{
    $this->_packageLayout = $this->getFileLayoutUpdatesXml();
}
 
public function getFileLayoutUpdatesXml($area, $package, $theme, $storeId = null)
{
    foreach ($updateFiles as $file) {
        $filename = $design->getLayoutFilename($file);
        $fileStr = file_get_contents($filename);
        $fileXml = simplexml_load_string($fileStr, $elementClass);
    
        $layoutStr .= $fileXml->innerXml();
    }
    
    $layoutXml = simplexml_load_string('<layouts>'.$layoutStr.'</layouts>', $elementClass);
}
//Mage_Core_Controller_Varien_Action
public function generateLayoutXml()
{
     $this->getLayout()->generateXml();
}

public function generateLayoutBlocks()
{
    $this->getLayout()->generateBlocks();
}

//Mage_Core_Model_Layout
public function generateBlocks($parent=null)
{
    foreach ($parent as $node) {
        this->_generateBlock($node, $parent);
        $this->generateBlocks($node);
    }
}

 protected function _generateBlock($node, $parent)
{
    $className = (string)$node['type'];
    
    $block = $this->addBlock($className, $blockName);
    
    $parentName = $parent->getBlockName();
    $parentBlock = $this->getBlock($parentName);

    if (!empty($parentBlock)) {
        $parentBlock->insert($block, $sibling, true, $alias);
    }
    if (!empty($node['template'])) {
        $block->setTemplate((string)$node['template']);
    }
}
//Mage_Core_Controller_Varien_Action
public function renderLayout($output='')
{
    $output = $this->getLayout()->getOutput();
    $this->getResponse()->appendBody($output);
}

//Mage_Core_Model_Layout
public function getOutput()
{
    $out = '';
    if (!empty($this->_output)) {
        foreach ($this->_output as $callback) {
            // $callback[0] is root and $callback[1] is toHtml(),all other blocks are children of root        
            $out .= $this->getBlock($callback[0])->$callback[1]();
        }
    }
}

//Mage_Core_Block_Abstract
final public function toHtml()
{
    $html = $this->_toHtml();    
}

//Mage_Core_Block_Template
protected function _toHtml()
{
    $html = $this->renderView();
}

public function renderView()
{
    $html = $this->fetchView($this->getTemplateFile());
}

public function fetchView($fileName)
{
    include $this->_viewDir . DS . $fileName;   
}
?>