Paul Kelly then went on an arson spree in which he torched his own house then broke into a family home and set it alight.
The residents of the house in Morley were at home at the time and described the incident as “like a scene from a horror movie.”
Leeds Crown Court heard heard Kelly, 49, was suffering from a psychotic episode when he committed the offences due to taking the synthetic cannabis drug .
He was given an extended prison sentence of 12 years over the offending which took place in October last year.
Duncan Ritchie, prosecuting, said Kelly’s girlfriend went to his home on Longroyd View, Beeston, Leeds, on October 10 to find the dog decapitated in the living room.
The prosecutor said: “He told his girlfriend that the dog had been possessed.
“The defendant burned the dog’s head in a bin and moved the torso on to a sheet and took it to a wooded area.”
Kelly then caused extensive damage to his home by setting fire to a gas meter cupboard on October 15.
A neighbour saw smoke coming from the terraced property as Kelly walked away.
Firefighters found the living room alright when they arrived to tackle the blaze.
Two fire alarms had been removed from the house.
Kelly targeted a large detached house on Asquith Avenue, Morley, the next morning.
Mr Ritchie said the house was surrounded by fencing and electric gates.
Kelly managed to get inside by smashing a window at around 7.30am.
Three people were upstairs asleep when they were woken by banging and found Kelly in the games room.
He was holding a cigarette lighter to a piece of kitchen roll and accused the woman who lived at the house of being a “murderer”.
The prosecutor said Kelly was shouting but not making any sense.
Emergency services were contacted and Kelly told police officers who arrived at the scene that there was a bomb inside the house.
He also said the property would blow up as he was standing near a large store of alcohol.
Officers tried to get inside but were beaten back by smoke.
One officer then used a fire extinguisher to put out the blaze and Kelly was dragged from the property.
Kelly was given oxygen at the scene and found in possession of a lighter and a screwdriver.
Two police officers also needed medical attention.
Mr Ritchie said one of the victims had been “sick with fear” over then incident.
Kelly was interviewed and told police he could not remember what had happened because he had been smoking spice.
Kelly pleaded guilty to arson being reckless as to whether life was endangered and arson with intent to endanger life.
The defendant appeared before magistrates last month and was given an 18-week prison sentence after admitting causing unnecessary suffering to an animal.
Kelly has previous convictions for serious offences. He was given an 11-year sentence in 1995 for armed robbery.
Oliver Jarvis, mitigating, said the offences occurred after Kelly stopped taking his medication for depression and experimented with taking spice.
Mr Jarvis said the arson attack at the house in Morley was a random offence.
He said: “This was not a plan born out of revenge or jealousy which so often these serious offences of arson are.”
Kelly was told he must serve a custodial term of seven and a half years followed by an extended licence period of four and a half years.
He was also made the subject of a restraining order banning him from returning to the house in Morley.
Judge Simon Phillips, QC, said: “If the householders had remained unaware of your actions the consequences could have been life threatening.”
Detective Inspector James Entwistle, of Leeds District CID, said: “The family whose home Kelly broke into before starting a fire were understandably absolutely terrified by his behaviour.
“His home address in Beeston, where he started a fire the day before, is surrounded by other multi-occupancy properties and the consequences could easily have been more serious.
“He also admitted killing and mutilating his pet dog, which many people will be appalled by. He has been indefinitely banned from keeping animals as part of his sentence for that offence.
“Kelly has highlighted drug use as a contributing factor to him committing these offences and this should serve as a warning to others of the dangers these substances present and the criminal penalties those who use them can find themselves receiving.”