We've had santa take dummies, and the easter bunny take bottles - it's always with plenty of warning and talk leading up to it, and naturally they get sometihng in return - DS2 got a lovely peter rabbit mug to have his milk out of instead. The fairy sounds like a good idea, as long as it's not a sudden thing without warning.
My eldest chucked his himself when it popped. We'd bought some of the cheaper ones to have as emergencies when we travelled to the UK and after we got home, as they popped he'd throw them in the bin. Didn't faze him in the least. However, my 2.5 year old still has his dummy for sleeping and i'm not bothered about taking it away from him. He doesn't walk around with it in his mouth (which is a pet peeve of mine!) so we're happy.
And, yes, thumb sucking is bad for teeth, but again it depends on 'how hard' the thumb is sucked. I sucked mine for a LLLLOOOOOOOONNNNNNGGGGGGGGG time (wont say when i stopped, but it wasn't early!) and my teeth are perfect. Mine was more or less just resting in my mouth, but i have heard of kids who suck so hard that they cause their thumbs to blister.
Dette, DS 06.03, DS 10.04, DD 03.06 & Due Sept 07!