This quote is uttered by Act V scene 1 as part of the denouement of the play. Before the confusion has been cleared up, Orsino realises that not only that Olivia does not love him, but also that she is desperately in love with his henchman, Cesario, whom he is beginning to realise he has feelings for as well. As a result he determines to do something extreme to get his own back on Olivia:

Perversely, the Duke hopes to gain his revenge by killing Cesario, even though he loves Cesario himself. This is of course yet another example of the way that when humans are inflicted with the "plague" of love, they will do such strange and bizarre things. In the quote highlighted in this question, therefore, the "lamb" is Cesario who is to be sacrificed in order to upset the "dove" who is Olivia, who actually, on the inside, is more like a "raven" because of her ingratitude and the way she is so unfeeling towards all of Orsino's protestations of love. This is of course before Orsino discovers the true identity of Cesario and that "he" is actually a "she" and that therefore he can love her with impunity.