I pretty much agree with you, Saint. I blur the line between children's and adult lit--most of the time I prefer books that were written (or at least marketed) for children/young adults.
We just read a book for today about a girl who lives in an orphanage whose real life is horrible, so she creates an imaginary life for herself, using the dolls she finds in a dollhouse in the basement to enact this imaginary life with her as the star. Very nice story, and as it progresses, we discover a link between the story Lucie is enacting in the dollhouse and a family in England. The daughter of the family in England, Delia, begins to write to Lucie.
So, the big question in class today was, "Is Delia real, or is Lucie just crazy? Did Lucie make her up, then write Delia's letters and mail them to herself?"--a kind of Fall of the House of Usher question--is the whole story just a dream of the house, which is a symbol for the crazy protagonist. The class discussion ended up that most of the members of the class would rather that this sad, hurt girl would be crazy than that something magical was happening in the story (that Lucie's play with the dollhouse had an effect on Delia's family 3000 miles away).
It was fascinating to listen to all their reasons why this book could not be fantasy. Finally I just aked one girl, "Why is it such a disturbing idea that something magical in the story has happened?"--especially given that the author had written two other obviously fantastic books--and she couldn't answer. She just felt that Lucie was not grounded in reality, and so therefore she must have imagined it all--simply because she liked to play with the dollhouse, using her imagination in a way that many children do.
Intriguing, how if you added the label "fantasy," or suggested that anything magical was happening, somehow half the class didn't want to touch it.