Many's the night I've been awakened to the sounds of some poor creature squeaking for its life as my cat toyed with it. The best method is to never hesitate, just dive right in and grab mousikins by his tail. Run outside with him, let him limp off to freedom, then lock the cat door so the little Angel of Death doesn't bring him straight back in.
One time my cat brought in an entire red squirrel through the cat door. Not a mark on it, but extremely dead. He must have backed in with the squirrel in his mouth o.O
Your cat killed a squirrel, AND brought it in...?
Damn!