The long interrogation was to get as much information out of him as possible. Once Tony finds the wire, I don't think there's ever a point where Tony's considering not killing Pussy
The editing of this episode was designed to confuse the audience and make us uncertain as to whether they ever actually killed Pussy, by flashing back and forth between the dream segments. They did a similar thing with Adrianna's death.
"...the successful annihilation of organized crime's subculture in America would rock the 'legitimate' world's foundation, which would ultimately force fundamental social changes and redistributions of wealth and power in this country. Meyer Lansky's dream was to bond the two worlds together so that one could not survive without the other." - Dan E. Moldea
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