Bad news, that sounds like Mange. Mange is a really difficult disease to cure.

http://www.ehow.com/way_5347311_cures-mange.html

You can try tea tree oil added to olive oil, that will soothe the skin, and may kill some of the mites
or
"The best cure for dog mange is to mix a 1% hydrogen peroxide solution with water and add borax. Dissolve thoroughly. Wash the dog with it once a week. Do NOT WASH THE solution left on the dog with ANY WATER. Do not wipe the dog dry. The solution will take effect on mange. The treatment period should not be longer than a month or two. The dog will probably not be resistant as the treatment is painless. This has worked well for me."

More Exact Measurements (excerpted from various emails on our Reader Question & Answer Section)

Ted replies, "A definitive recipe is add 1-2 tablespoon of borax per 500 cc of 1% hydrogen peroxide solution. To make a 3% hydrogen peroxide to 1%, roughly get one part of 3% H2O2 plus two parts of water. Then apply them on the dog. Wash with this solution daily, no rinsing. If it doesn't go away, I have found mites, or mange to have a large "beehive" hidden somewhere. In which case, quarantine the dog in a small area that is 100% sterile."
or go here

http://mangecures.com/home-mange-cures

The dog may also need antibiotics as mange often results in secondary infections.
What about a rescue group, can you call them to catch the dog?