Ah, I think I see your problem: gunzip is not an SQL query.
What you have to do is create a 'shell' user (it's on the Manage Users tab in the panel). Then, you can log into your account through SSH. I use an external program called PuTTY to do this. You point PuTTY at -server-.dreamhost.com, (my one is powerbar.dreamhost.com), and you are asked to type in the username and password for the user you've just made.
Using the shell is a little like the good old MSDOS commandline. If you're familiar with Linux, then what you'll get when you SSH is a remote bash shell to the server. (you can pick some another shell type on the Manage User tab, if you're familiar with it)
If you can navigate to the directory with the .gz in (you may need to look up the bash commands on the Wiki - http://wiki.dreamhost.com/index.php/Shell_Commands - or Google, they're not dissimilar to MSDOS), you can type in the gunzip command there, and it should gunzip the archive, and pop the results into mySQL. Hopefully.
That's what I'm trying to do anyway, it's been over fifteen hours and my shell user is jammed on 'Pending', (http://wiki.dreamhost.com/index.php/Enabling_Shell_Access which is fourty times longer than the Wiki would suggest, and counting) but I wish you luck.
You mentioned whether or not you should create a database. You probably should, and you should make sure that it has the same name as your old database (or your old code wont work, unless you change it).
It's possible for the SQL dump you created to create the database (it probably creates the tables for you, but only if you selected it), but because of Dreamhost's setup, you may not have the correct priviledges to do it via the shell.