> A common counter argument is, well you can suspend your disbelief and imagine a dragon, so why is a diverse community in a small village not ok? It just feels less immersive. Yes, I can go along with it - but I'm not sure it works. It feels like the modern world superimposed in a fantasy setting. I'd prefer to be sent to an alien world.

I think it might be worth thinking about whether this is actually "European fantasty" or just "fantasy" that you're used to as thinking of European. For a thought experiment, imagine a young adult today who has never consumed any sort of fictional media (novels, movies, etc.), but otherwise has the same education in terms of non-fictional things (math, science, history, etc.) that you might expect. If you showed them two portrayals of a Lord of the Rings setting that were identical except for one using only fair-skinned, European-ancestry actors, and the other with the type of "diverse" casting that you're describing, would the latter seem somehow less believable? I'm not convinced that someone who hadn't already been primed to expect fair skinned, European-ancestry actors in fantasy due to having already consumed decades of content with that sort of casting would somehow find that more "accurate" in a world full of elves and dwarves and orcs and other fictional races alongside humans. In a vacuum, I don't think there's really any sort of tension between elements of traditional "European fantasy" (dragons, wizards, sword fights, etc.) and diversity when set somewhere that pretty clearly is not supposed to be set in medieval Europe (or really at anywhere at all in the history of Earth); insisting that some small subset of the lore happening to resemble European fantasy somehow implies that the entire fictional world has to demographically resemble medieval Europe seems like much more of an imposition of external cultural expectations than casting diverse actors is.