I would advise a dream like haze of blending reality. Dreams can be influenced by real world stimuli (I once had a dream that I was with Scooby-Doo and the gang and we were trying to solve a mystery that included an odd sound no one could find a source for. When I woke up, it turned out that it was my parent's alarm clock). A much odder phenomena is "sleep paralysis" where a person wakes up before a dream ends. Basically, the dreamer wakes but finds they are unable to move their body and there is an unusual presence in the room (often described as either a moving shadow or a goblin, witch, demon, or grey alien. The nature of the presence is different given the culture of the victim, but there are a whole host of myths throughout the world of folk monsters or entities associated with an inability to move. Europe favored demons, goblins, or witches. Japan has a tapir like creature associated with the phenomena (it looks vaguely like the Pokemon Drowsey. Notably the Japanese myth predates the discovery of the Tapir in South America).
Basically, what's going on in sleep paralysis is that for one reason or another, a person wakes up in a way that doesn't terminate REM Sleep, the phase of the sleep cycle where we dream. During this period, the brain stops the body from recieving signals for voluntary motion, to prevent your dream running you into a rock or off a cliff. This is a safety feature, not a bug, of REM sleep. When you wake without exiting REM properly, it will fail to stop you from dreaming and basically overlay perceptions in your dreams with your perception of reality.
In effect, this acts sort of like how the dream thieves in "Inception" work: The setting in your dream is created separately and you populate the dream with it's characters. Since being suddenly awakened is normally due to some external problem pulling you awake, your mind instantly starts searching your room for the source of your sudden alertness... and since at this point, you're in a lucid dream, you create your own nightmare, and it's composited onto your own sensory stimuli. It's like putting a CGI character in an otherwise practical effects only scene. It's a real picture, but it's painted over to look like the fictional element is real too.
It's entirely possible that the victim in your story is responding to both external pain stimuli and "sleep paralysis" so that the it's difficult to tell if it's real or fake. I'd highly recommend watching the Star Trek: TNG episodes "Chain of Command, part 1 and 2" which include a rather realistic depiction of a torture victim's reaction through the process. While the depiction is mostly contained in the second part, the two episodes combined are required to understand the story. Another TNG episode, "The Minds Eye" features another character's torture using electric stimuli that could be used to force a blind character to "see" whatever the torturer wanted him too, and more importantly force him to look at it (as the "images" were bypassing the optic nerves and being beamed directly into the brain for processing") and the effects of false images like dreams to effect the character's reasoning.
Both episodes do end with the tortured character reflecting on the fact that they were convinced certain falsehoods were indeed true.