Your kids must be really young still, and if that's the case, then I agree they can become confused. The flip-side to that though is as a parent, you still have the most influence in teaching them right from wrong as you see fit. However if we're talking about kids older than 8 or 9, then you may be giving them too little credit on being able to separate fiction from reality when it comes to stories of wizards and monsters.
Nightmares are not an indicator that they think something is real. What it means is their imaginations have taken hold of something and are playing with it while they sleep. I have nightmares still from time to time that involve monsters and such. I'm 23 and know no such thing exists as zombies or vampires... but sometimes after watching a horror movie or reading a horror book when in the right state of mind, I get nightmares.
I would suggest you try reading the books and learning for yourself if any of the fears or claims or true. Researching "real" spells to give her fictional ones more flavor is not anything even close to introducing even the most basic concepts of the wiccan religion.
It saddens me when people protest things they don't have any real understanding of, that take small pieces of interviews out of the context they're meant in and jump to conclusions.
I've read the books, and I have a foundational understanding of the whole wiccan thing as I have several friends who profess that particular faith, and all the fear and such over Harry Potter confusing kids over religion, or introducing such satanic things as witchcraft are entirely absurd. Such assertions almost always come from people who have never read the books and haven't the first idea of what a wiccan is beyond what they see in horror movies of old ladies with crooked noses and broomsticks.
Also, the Narnia series... the first story is pretty firmly rooted on Earth, and the stories talk often about the cross over of magic into our world. It's about normal kids on Earth who are pulled into Narnia to do great and epic things. Are you worried about your kids trying to climb through old wardrobes, or ship paintings to get to other worlds?