Who is Liable for a dog bite?

I was going out the front door with our dog a german shepherd, our house is about 100 feet from the street. Our neighbor was walking his dog off leash. Our dog is about 70 pounds, the neighbor's dog is around 100 pounds. The neighbor's dog came on to our property, I told the dog to get off repeatedly, the neighbor just stood there. Then, the neighbor's dog came right up to our dog, which was at that point standing in front of the house. Our dog then bit the neighbor's dog. I immediately grabbed our dog to separate the dogs. The neighbor's dog needed stitches.

The neighbor came by our house, and told me he wants me to pay his vet bill. I told him he should not have allowed his dog on our property, he told me that was not relevant. I am wondering how to best deal with this situation.