Ditto to this. HOWEVER - please read up on crate-training. The crate should be presented and reinforced as a GOOD place for the dog. Use treats, soup bones, or rawhides, feed her in the crate, make it a good place. Read up on it. I would definitely advise putting her and yourselves in an obedience class with a good trainer right away.
I would not recommend 'spanking' dogs with newspaper or anything else. Better to set the dog up to succeed - dogproof your house and work on training, training, training. I'm not sure what you mean when you say you 'manhandle' this dog, but I would suggest NOT using brute force and concentrating more on building a solid, mutually respectful relationship. You do not need to 'spank' dogs - a very solid and humane 'punishment' is the withdrawal of your affection/attention. Example - dog jumps up and mouths. Cross your arms and turn around. DO NOT get into a power struggle with the dog, and manhandle or force the dog to the ground. You are then giving the dog what she's wanting - interaction, which may, in her eyes, be positive ('are you wrestling with me?'

. Manhandling and brute force is NOT necessary in dog training. The better trainer is the one who whispers, not the one who yells.
Set the dog up for success. Dogproof the house. Puppies, esp those from bad environments, display undesirable behaviors. Dogproofing the house means putting things you don't want the dog to have out of reach. For those objects that cannot be put out of reach, if the dog gets hold of it, work on an OUT command (drop it). You can train the dog to OUT by 'trading' - offer the dog a more valuable item (eg liver treat) and praise the dog when they drop the desired item. Do not try to use force, scare the dog into dropping the item. Teach the dog that it will benefit the dog to do what you ask. Don't work on the OUT command for the two seconds that the dog has the dishtowel etc, work on it every day as part of what having and training a dog is about, so when she does grab something it shouldn't have, she will be more likely to release it. Simply tugging of war with the item teaches the dog that grabbing things she shouldn't have will make you play with her - great way to teach her to grab things she shouldn't have.
If the dog will *not* surrender the towel,
This is misuse of a spray bottle. And it's not training. The dog should not know where the water came from. She should not see a spray bottle in your hand. IF you use a spray bottle, use it correctly - timing is VERY important and if you screw that up you will not train the dog at all. The idea of a water spray is that the dog does [undesirable behavior], this strange act of God comes up and she gets an unpleasant experience. Using a water spray to get something out of a dog's mouth, I cannot figure out any logic. You are simply threatening the dog. This is not training.
I do not threaten dogs. I certainly would not threaten them with a muzzle. What happens if the dog NEEDS to wear a muzzle, for some reason, and they think they are being punished? eg a dog that needs wound care from the vet which may hurt, and the vet fears being bitten? You have taught your dog to fear a muzzle. Besides, there are many effective ways of training dogs to utilize self-control so that you have TRAINED them to behave appropriately. You don't wait for the dog to do something wrong and then threaten them with spray bottles or muzzles. These ideas are quite disturbing. Teach them how you want them to behave, don't set them up to fail by not teaching them what you expect and then making threats when they do fail. Training is a dynamic ongoing process and the idea is to communicate what you want in a way that the dog understands. If you cannot get an item out of her mouth until you physically win a tug of war or wave a spray bottle in her face, of if your waving a muzzle in her face is the only way to get her to settle, you have to go back to the beginning and train her.
The whole family needs to be involved - if only one person can handle the dog, this is a recipe for disaster and the dog WILL end up in rescue or a shelter or given away to someone sooner or later. You do not need physical strength or things that are scary to the dog to train her, the important thing is communicating what you expect. This can be done by a 100-lb woman. I would advise the whole family to take part in basic obedience with a good trainer. Try to focus on positive motivational training methods.
Good luck,
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http://geocities.com/barleesangels Barlee, forever in my heart Until there are none...rescue one