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I saw you tried water.
Be sure to go outside with your dog every time. Humans scare these birds.
Just in case bring a pop up umbrella if the owl flies you can pop it open at him.
This site has some good ideas on scaring the bird away
You might want to remove the tree or some branches on it so he has no perch. If the area is open enough that crows can spot him they could chase him away for you.
But you may find fire crackers or repeated soakings with a hose or a supersoaker type water gun will work.
This is the time of year that young birds who don't know what exactly is the prey they should be looking for are out learning how to hunt so this may be a hungry young bird which is why it is looking at your dog.
If you can't remove the tree you can string some clothesline across the yard making it hard to fly down into it.
Or you can set up a roofed pen area for your little dog so the bird can't reach him.
There are wildlife 'pest' animals removers who may be able to relocate the bird for you too. Check your yellow pages or contact your local shelter to see if they know of anyone.
Hope this helps you!