Well, I first promised to work on that back in late March, and it's now June, so I figure I might as well share what I have so far. I figured it would be better to do that in a separate thread from the main Redux thread, as this won't be a part of the scenario for quite some time.
The first thing I did was to construct a color table to use in the sprites. I focused on duplicating color palettes that were already used by other monsters in M1 - such as the Hunter - that seemed to have been used in the few remaining images of the Hound. The result was this:
That was back in March. After finishing the color table... I kind of stopped working on the project for a long time. Then, finally, this last week or so, I got around (belatedly) to creating the actual basis for the sprites. For a while I debated what the best process for this was, but I eventually decided that, rather than try to draw nice HD models and then use those to create smaller sprites, I would instead just go directly to creating the sprites.
My work process goes like this: first, I draw black lines on top of a blue background, like so:
Spoiler:
Drawing it at the same size as the final sprite (in this case, 175 pixels wide by 123 pixels tall) makes the process faster, as I can be more rough with the creation and focus on the shape of the final product. This particular outline was directly based off of one of the surviving images of the original Hound.
Once I have one such outline, I can then use it as a basis for creating more outlines like it:
Spoiler:
In this case, I started by basing the left-most drawing directly off of another surviving image of the Hound. I then copied it and modified the copy to create the middle drawing, and then copied that to create the drawing on the right. After I had the outlines, I just filled in some basic colors from the color table on a lower layer just so I'd have a better feel for how the drawing looked.
Currently, my plan is to complete the outlines for every sprite I need (62 of them in all), and then paint/shade them to create the final versions - once fully shaded, they should look a lot prettier than they do right now. I have a small spreadsheet I created to track my progress:
Yes, I know that I only have 4 of the outlines done at the moment, but the creation process is actually easier, faster, and more fun than I had originally anticipated - the long delay has really just been due to laziness (oops

I'll post more updates in future as I make more progress.
P.S. I'm sure the sprites won't look amazing even when completed, but I figure that as long as they fit in decently with the other M1 sprites (which are much easier to emulate than the M2 sprites), then that's good enough.