I use stories to illustrate points in my work with kids all the time - I think they are great at providing the opportunity for learning and discussion with kids... and I think kids will take lessons from them that are far greater than simply "setting kids up to believe things that may never happen".... there are morals and lessons in everything... otherwise why would we tell them a story from our own past to explain something... everything is explained with some kid of story... and books just formalise the process...\

I have a few favourites - but I can think of these at the moment..

The Blue Day Book for Kids - Bradley Trevor Grieve (as it says - strategies for feeling better when you are sad..... with animal photos - awesome... kids love this one!!
Ish - Peter Reynolds (Love this one!! It's about accepting your 'attempts' at doing things, and enjoying them, rather than expecting perfection
Witches and Fairies - Eva Montanari (about being left out - but that we are all a bit the same, no matter how different)