Hi MightyDior,
I too was VERY afraid of dogs when I was young. I got bitten by my aunt's German Shephard. Actually, I am still a bit afraid of dogs (Big ones) if they are not on a leash. Now that I have Baby though, (had her for a little over a month), I am not as afraid of bigger dogs. Do any of your friends/neighbors have friendly dogs that your child can visit with? Also, Yorkies usually stay fairly small. Maybe your puppy won't be as timidating? As for the Yorkie/Children mixture...if you are set on a Yorkie, just have them be careful with the way they handle him/her. They are very delicate and get broken bones very easily.
Usually the first thing a child wants to do is pet and pick up a puppy. Good luck!