I've not followed this whole thread, so apols if I'm missing some vital piece of information.
It's one thing bringing a puppy, I think generally most kids and adults who don't feel safe around dogs wouldn't have an issue with a pup.
Granted your dog was on a leash (also I don't know the breed of dog).
The thing that many dog owners seem to get is that you may know your dog is well-behaved, but a stranger doesn't. Also, to be honest, a stranger doesn't know whether you, as an owner of a dog, are well-behaved.
Someone once let their large dog go bounding right up to my friend, who was lying in the park next to her newborn baby. The friend threw herself over her baby to protect him, then the owner shouted out: 'It's alright, he won't hurt you!'. That statement may make perfect sense to someone who knows the dog inside out, but to a stranger who's afraid of dogs and who's just had a random dog lurch towards them, the owner looks like an insensitive prick.
So in summary: IMO dog owners shouldn't make assumptions about people's comfort levels with dogs, and all the more so when children are around.