10 Horror Movie Nightmares WITHIN Nightmares
2. Nazi Mutants - An American Werewolf In London (1981)
An American werewolf In London could very well be the first, and certainly the most infamous, use of the nightmare within a nightmare trope. It's also perhaps the most effective; no one saw this one coming on initial viewing (OK clever clogs, maybe you did).
David and Jack, two backpacking Americans, find themselves lost on the English moors late one night when they are attacked by a werewolf. Jack is killed and David wakes in a hospital in London, injured from a bite but alive nonetheless. David begins to experience visions and it soon becomes clear is becoming a werewolf himself; this is where things begin to get wonderfully weird...
One night whilst still in hospital, David dreams he is home, surrounded by his family and enjoying an episode of The Muppet Show, when the door bell rings. Nope it's not the postman, it's a cohort of Nazi-mutants armed with automatic weapons. His family is slaughtered and David has his throat cut, waking from the nightmare at the pivotal moment, to the sedate surroundings of his hospital bed and the unique charms of nurse Alex Price. Phew, says the audience collectively.
Alex has "just the thing" and heads to the window to let the morning light in. She whips the curtains open and BANG! She's stabbed in the chest by another Nazi-mutant thingy who's hiding behind the curtains. David screams out, only to awaken for a second time, still in a nightmare.
It's a superlative jump-scare; thoroughly unexpected, audibly assaulting and appropriately violent.