^ Terrible. Yet apparently completely legal, as long as it's on your own property.
Give the dog a chance, first. I'd recommend talking with the neighbor and letting them know you are afraid of their dog. Not angry that it's running around. Afraid. Some owners don't get it, because their little puppy is so nice and friendly all the time - when the owner is around. When they tell you not to worry, because he's friendly and doesn't bite, get it into their head that the dog acts different when the owner isn't there. If they care about their dog, they'll fix the problem. If they don't take kindly to your words, at least you tried. Call the police. Be prepared.