I'll throw in my two coppers, though at this point seems it's all been said.
1) Yes, absolutely it depends on the setting.
That said...
2) The OP asks about "fantasy races" in a "fantasy setting." If I'm playing in a "fantasy setting" and I'm told there are no elves or dwarves or dragons or magic...then in what way is it "fantasy"? It may be steam- or cyber-punk or "historical" or sci-fi or some kind of cross-genre combo, but for fantasy...?
May be it's the Tolkien (and other literary sources) and real world legends/myth base that is my first love, but if I'm playing "fantasy" I want to see elves and dwarves (at least!) on the roster.
Re-flavor/season/fluff them as you wish or the setting allows (aquatic elves and sea-faring halflings in a water-world/sea based campaign, for example. Valley-dwelling dwarves/"picts" and hill-dwelling dragon-worshiping "dark fey"...what have you.)
I'm all for "gritty" games and "realism" (i.e. "internal consistency") in my play/game world. I'm even good with "low magic" settings (as long as there's SOME magic to be found).
But if I just want to be a human, I can just get my fat ole butt outta bed and go through my day.
--SD