In Chapter 6 of Of Mice and Men, Steinbeck uses the dream sequence to give Lennie some depth of character. The dream functions as a kind of soliloquy, for the reader could not know what Lennie is thinking otherwise.
The dream presents Lennie's great fears: first disappointing Clara and George and then being abandoned by them. Clara turns into a giant rabbit and tells Lennie that he isn't worthy to tend them on the dream ranch. The rabbit also tells him that George is going to hurt and leave him. All of this, more or less, will come true.
The rabbit is an example of Steinbeck's anthropomorphism (attributing human qualities to an animal). It is obviously an omen that foreshadows Lennie's death. He almost sees it coming, though he never suspects it when awake. The rabbit is a symbol that the American dream is an illusion, that it is destined to tempt guys like George and Lennie. Subconsciously they know that the dream ranch was only a romantic ideal; it could never have worked out.
In using Lennie's dream in chapter six in the novel Of Mice and Men, John Steinbeck allows readers to see into Lennie's thoughts, to understand his fears.
In chapter five, Lennie killed Curley's wife. He didn't understand what he was doing, and he doesn't understand his own strength, being mentally challenged. But nonetheless, he has committed murder, and he understands that he is responsible for something bad and that George will be disappointed.
Chapter six describes the dream Lennie has which opens with his Aunt Clara speaking in Lennie's voice. She is scolding him for doing bad things and being a burden to George. Aunt Clara was Lennie's caretaker before she died, and she asked George to take care of him when she was gone.
Next, in the dream, a gigantic rabbit scolds him. He tells him he isn't fit to tend rabbits, that he would forget to feed them. He explains how much George has done for him, and that Lennie has been nothing but trouble to him. Clara says (in Lennie's voice):
"I tol' you and tol' you and tol' you, mind George because he's such a nice fella and good to you, but you don't ever take no care. You do bad things. You never give a thought to George. He's been doing nice things for you all the time. When he got a piece of pie you always got half or more. And if there was any ketchup, why he'd give it all to you."
Lennie responds that he knows, and he tries, but he seems helpless against making bad choices or doing bad things.
The dream highlights Lennie's greatest fears, that he is worthless and causes only trouble to those he loves. He has disappointed his Aunt Clara, George, even the rabbits he so wants to care for.
The dream foreshadows Lennie's death, which occurs in chapter six when George shoots him in the back of the head.
George's final conversation with Lennie is about their dream, that they would get a little place and "live off the fat of the land" where Lennie could tend rabbits. It was a merciful act that George allowed Lennie to visualize their dream, keeping his hope alive until the end of his life.