I agree completely Tim. They start out believing thru the world, but we use it as kind of a make believe game as children love this sort of thing and it's innocent if you don't lie to them. You know, they watch the Santa Claus shows, look at the books & pictures, hear the songs. When the younger ones ask I say well what do you think? If they are doubtful, that's fine, I tell them it's still OK and fun to play make believe with your little brothers and sisters so you don't spoil it for them til their ready, if not that's OK too.
When they are ready I explain the difference between a real Jesus and a make believe Santa. That's very important. They accept this because they have learned the difference between make believe fun and what is really real and most important: JESUS.
Jesus is real and by this time they have established the beginnings of a relationship to Him through our prayer, Bible reading, almost daily talks about God, etc. They know santa isn't like that, and I tell them right off, Santa can't see you when your sleeping or know when your awake, he doesn't know if you've been bad or good but Grandma & I do. And Jesus knows a whole lot more than us... Well, you get the picture.
And I agree with Tim, don't lie to them.
We also don't push materialism and shower them with hundreds of dollars worth of gifts.
Small personal gifts are sometimes appreciated as much or more, and I remind them also
that it's Jesus' birthday who is are Savior and Creator of all things. That he was born in a smelly stable in the cold and received only 3 gifts. It puts things into the proper perspective for them. And it's also very important to teach them to give using the same principle of God giving so much to us as well as Jesus giving his life for us. They usually seem to start getting an understanding of this around the age of 5 or 6.
I have had late night talks with my 6 year old grandson about God, His Creation, etc., that many adults wouldn't understand. Always try to keep in tune to your child's natural yearning for God. It must be fed, watered, nurtured, encouraged. We are the tool God uses to educate them. His Holy Spirit will do the work if we just 'water the garden'.