I guess I disagree, to a point, with most here. As far as it goes, I think Santa is fine if understood as only a myth of tradition, but not if presented as a fact of reality.
Children can be stunted in a very real way by introducing the idea that this is not just a myth that we Make-Believe this tradition, but a truth. During the first years of a child's life, they are desparately grasping for information to make the world understandable and consistant. This is the worst time to introduce the idea (as true) that mysticism is real and good and faeries and magical people are the way of the real world. Aside from the whole lying thing, this is more destructive.
Then, as they start figuring out the lie, they may keep the idea that magic is real, but THIS time, it wasn't. And Mommy/Daddy are dishonest.
Double-good going.
