The best child actors are... well, Dakota Fanning. There aren't many others. In all of film history, only a few kids have transcended precociousness or self-aware mugging to do real acting. Jodie Foster, Tatum O'Neal and Anna Paquin come to mind. Probably the best male child actors both have Alabama ties -- Lucas Black in Sling Blade and Haley Joel Osment, especially in The Sixth Sense. (I personally love Peter Billingsley's performance as Ralphie in A Christmas Story, but that's still not Fanning-esque.)
I've worked with a few kids, and directing them is tough. The key with kids is to get them to relax and ignore the fact that they are acting. They have to ignore the camera, ignore the crew and ignore the equipment. That's to say nothing of actually becoming a character. It's hard to do. I've worked with some so-called professional actors who couldn't pull it off. I read about a commercial director named Bob Ebel recently who brings out great performances from average children. He does it by disguising the camera and gear in a set that looks more like a household room.
Here's a link to a brilliant spot he did for Trigon Blue Cross/Blue Shield.
