I just read a bit about it and it sounds like terrible stuff.

Tea Tree Oil Information

I wouldn't use it. Look around and see if you can find cedar oil, and at that to dog shampoo, or maybe there are some cedar oil dog shampoos already. Cedar is supposed to be really good at keeping fleas away. I know that dogs do react badly to the phenols in cedar oil while it's in shavings, but I'm not sure of the quality of the oil after it's been extracted from the wood.