Merlin, also known as Pendragon in Return to Labyrinth, is Sarah's dog. He bears great resemblance to Ambrosius (interestingly, in some versions of the Arthurian Legends the wizard Merlin is known as 'Merlin Ambrosius').
In the film, Merlin is seen representing Jareth the Goblin King when Sarah is reciting lines from her book The Labyrinth. Sarah then notices that it's seven o'clock and she is meant to be babysitting her half-brother Toby, so she runs home with Merlin.
As the two race home, it starts to rain and by the time they arrive home, they are soaking wet. Sarah's stepmother Irene scolds her for being late and won't allow Merlin into the house and instead sends him to the garage.