Hello there! I just got this game from steam myself, and in bygone days I had the same problem as you do. Such games used to reach a level of intensity whereby I could not play, therefore I didn't experience the art. It was just a startling intro that I never returned to, an internet screech prank that I never opened up again. Of course this game is much more, and I can tell from where you stopped, the first encounter, it's just a matter of shock value that's holding you back.
I tell you this, as a horror fan, that emotional reaction what I bought the ticket of admission for, as it were. Sadly, if you're going to play horror games, and it's anything like what I experience, desensitization is your only route. I suggest you load your game, and go get killed by the dog, then load it again, get killed by him again. I had to do this for system shock some time ago. Some people may tell you turn the lights on, lower the volume, play with friends about.
If you're anything like me, you already have the gamma low enough that you can't see anything without some form of light or this game's dark vision feature, and even then you can just barely guess at what you're seeing, your volume is up very high and you mostly (if not exclusively) play at the dead of night or in the darkest room of your house. If I'm right, with all due respect to the advice before me, I say don't change that. It enhances that feeling of being alone, allowing you to empathize with the situation more and get lost in the moment all the better. It's what you came for and you don't need to diminish your enjoyment to experience what you came for.
Instead, after you've died a few times, start trying to avoid the critters. Don't stay still too long, if you kept your character still for ten full minutes, it's not the game psyching you out at all, it's yourself.
You can actually confront the dogs, and it's rather easy to kill them when you get used to it, so I would suggest trying to avoid fighting under all circumstances. Once you start to feel as if the enemies are just encounters that you've figured out the pattern for, the tension is broken and it's just impossible to have fun with the game. Don't worry, the sequel has handled this issue quite neatly, as they really commit to it and make you essentially unable to defend yourself. I assure you, it's as great as it sounds!
If you're still having trouble, I would suggest you watch a play-through of the game, youtube is usually quite good for that. Watch a section or two, maybe five to ten minutes of gameplay to see how things go, then stop and play for yourself.
P.S.-In case you suffer severe spasticity, and the sudden noises cause you physical pain, you should play with the volume off a few goes, turning it up a bit and restarting at some place where you'll hear a loud noise, getting it loud enough so that you're frightened by the setting and not just becoming averse to pain, but quiet enough that you can play for more than a few good jumps without needing to pause it and spend the next 10 minutes recovering.
P.P.S.-This isn't a 'doom 3', where the lights in the game turn off and after a few repetitions you just sigh, turn around, and fire, and sure enough you found the enemy. So don't worry about desensitizing yourself too much, the game does its job well and you'll be enjoying it the whole way through once you get your legs under you well enough to take the journey.