For some reason, known only to dogs and cats, dogs seem to always want to chase cats. Here is how to keep your lovable canine friend from chasing your neighbor's fluffy feline.

[edit] Steps

Take your dog into the room with the cat. Make sure he's wearing a leash and a collar or harness. Also make sure the cat has an escape route in case the dog does get away from you.
If your dog tries to run after the cat, hold him back with the leash and shout "No!" If your dog already knows another command for stopping and returning to you, such as "stop" or "leave it," use that command.
Try spraying him on the face with a plant spray bottle full of cold water if he does not respond to your voice alone. Say "No!" again at the moment you spray him. This should get his attention.

[edit] Tips

You will need to repeat this more than once for the dog to learn to curb his chase instinct. If your dog still tries to chase the cat after many repetitions, you may need to consult a trainer or attend obedience classes to teach your dog to be more responsive to you.
It is best to teach your dog that no means no. If they ever do anything at home that is bad and you catch them in the process, say "No!". If you don't catch them, consider it a learning experience (for you) and be more vigilant about watching them in the future. Punishing a dog after the fact will not work, because the dog does not understand the connection between a past action and current punishment.
Teach your dog the "leave it" command. Start with a tasty treat in each hand. Present one hand to the dog. As he tries to get the treat, say "leave it" again and again (don't let the dog have the treat) until he stops trying to get it. As soon as he stops, give him the treat from the other hand. Keep practicing until the dog stops going for the treat the first time you say "leave it". At this point, start practicing with other objects (toys, rocks, leaves, etc.). When he is reliable with these items, you can start practicing leave it with the cat (or other small animals like squirrels, birds, etc.)
A tip about commands. You don't need to yell or raise your voice even. Did you ever notice when you hear the "snap" of a dog food can as the lid pops open how it gets your dogs attention? It is a consistent noise, and the dog knows what it means. The same is true for verbal commands. They should be consistent and do not need to be yelled. In fact as you can see with the example of the food can lid, a command can be anything you want it to be.

[edit] Warnings

You shouldn't use a chain as a leash, since it can seriously hurt your pet. If your dog eats soft leashes, spray the leash with Bitter Apple. Bitter Apple will not hurt your dog, but it tastes bad, preventing unwanted chewing.
Don't hit your dog, especially on the face. This can cause your dog to develop behavior problems, like aggression and fearfulness. If he's already aggressive, dominant, or subject to fear-biting, it can provoke him to bite you.
Not all dogs can learn not to chase animals. If your dog has a strong prey drive, he may always try to chase small animals, regardless of his intelligence or desire to please you. For these dogs, focus on teaching them the "leave it" command, make sure they get a lot of exercise every day, and keep them on leash anytime they're outdoors.