He won't be able to leave the location of the dream, wake himself or anyone else up, or permanently stop the nightmares from appearing. Basically, he can't end the effects of the event early for anyone, but aside from that you're welcome to give him free reign over the dreamscape since it's one of his natural abilities.

Death still functions based on characters' influence, so that applies to immortality as well! If Merlin is normally able to reform himself then he can keep that ability during the dream if you'd like him to.