I don't see a problem with telling fairy stories to very small children. Once they learn how to reason it's pretty disrespectful to lie to them.
I don't think if I had kids I would tell them fairy stories, and if they asked, which they probably would once they learned to reason, whether the fairy stories other folks told them were true, I would certainly not lie to them.
How to explain the stories? People like telling stories to children, and inventing magic. We could probably discuss some other sorts of stories and invented magic at the same time.
What's my pole option?
EDIT: A more interesting question to me: what about other peoples' children?
I don't think I would explicitly say "Santa isn't real" to someone else's kid, but I would certainly not affirm the story.
I wonder how different the internet has made finding out.