I can't really see what the problem is with half-elves.
In this case, the possible misuse is not an argument against proper use. Both are player races, with somewhat similiar physical properties and some already existing "halfbreed" characters. Elves and humans marry (and obviously have secks

) all the time in Illarion.
I don't know what sillyness (but it certainly is a degree of that) it is to try to make weak comparisons between half-elves and half-dragons, vampires or werewolves. If there is any problem with half-elves, then it is just the one which is present with all races, that they are played completely without any racial quirks or behaviour. If you allow half-elves (which are okay), you don't have to allow half-dragons (which are silly). If someone wants to play a half-dragon, then he should get a permit (and the necessary guidelines) for that from the staff (which the staff can and probably should refuse).
Half-elvishness/humaness is just another thing which adds some story and some 'depth' for the character when in use by an advanced player. They are not force-RP'ing with racial uberpowers or anything of the sort, at least any more than any other random group of people. The RP-police ought to keep their collective fingers off them. As for the "half-elves requiring a graphic of their own".. you know just as well as I do, Damien.. that it is complete, utter and total bollocks. We've had halflings (and others) with human graphics for how long? As well as the priviledge of them being "halfbloods" and hence looking like the side which just happens to be more dominant (that being either Elven or Human and decided by the player).
The staff ought to consider, is it really worth it to start policing yet another completely harmless aspect of the game from the ivory tower (I don't understand what Damien has against transparency, really) which will only serve to annoy most players who play such a character well? Additionally it will annoy those of us who don't play such characters, but have a certain libertarian mindset in regards to the stuff which goes on IG. (Call me an RP-Libertarian)
This time I think that the staff could take a historical action, and actually change its policy to match with the things which have been going on ingame for as long as I can remember. You don't have to officially approve them, but I think that banning half-elfness and any crackdown on half-elven characters would be ridiculous.
If you really want to do something useful in regards to half-elves, then you would make some guidelines on how to use them*. But maybe, that's just a too sane and productive thing to do.
Not every aspect of the RP has to be regulated. Give people at least some room to play their characters the way they want to do it, when it is not harming anyone except the nerves some elitist RP-police individuals.
*Like
1. Half-elves are mortals, with slightly longer lifespan than humans.
2. Half-elves generally resist the signs of aging rather well, regardless of which side of them is more dominant.
And so for.