When a dog is spotting blood from his penis, there is generally a standard set of diagnostic tests that are performed. First, we perform a urinalysis and urine culture, which helps to tell if there is a urinary tract infection. If there is no infection, then we usually take an X-ray to help evaluate the prostate and also to look for bladder stones. If the X-ray is normal, we do an ultrasound to further assess the kidneys, bladder and prostate gland for signs of cysts or tumors. Occasionally if we still do not find anything abnormal, we check the dog’s blood pressure and blood clotting ability to look for more uncommon causes of urinary tract bleeding. However, I would guess that the most likely source of the bleeding is your dog’s prostate gland. This gland, which sits just behind the bladder in male dogs, is a common source for urinary tract bleeding in unneutered male dogs. As the dog ages, the prostate gland enlarges and can develop cysts or even tumors that can bleed. Usually, neutering the dog is the solution to the problem. By neutering the dog you remove the source of testosterone, which will then allow the prostate gland to shrink. This will usually stop bleeding coming from the prostate gland.
He needs to go the vet and i would Neuter him too.
Found answer here-http://en.allexperts.com/q/Dogs-701/dog-bleeding-penis.htm