Two things - first and very importantly, please Be Careful in putting a muzzle on your dog and then introducing her to another, smaller dog. Muzzling is a great tool for control, but it can also lead to other issues. The device can make a dog feel attacked and like it needs to defend itself, because they have no real control over their mouths. Adding that to a high-stress situation like meeting someone new can lead to dog on dog problems later on, especially if the meet and greet with this little guy goes wrong. So watch your dog carefully, if she's showing signs of distress, looks defensive, or gives warnings (raising hackles, growling, keeping her tail low) don't bother introducing her to the new dog while she's muzzled. Chances are, there'll be some frustration to take out on it as much as there's all the other stress factors at play.
Second, if the little dog takes lightly to being squirted with water add a little citronella oil extract to the water and mix well. Citronella will make the water unpleasant and, if the dog considers being squirted a game, will firmly state opposite of the dog's opinion. It shouldn't be harmful to the dog (unless by chance he's allergic) other than providing a foul scent and taste.
Good luck and keep us posted! :)
The path is different for you and me, but the journey begins in the heart.