c. 1300, fairie, "the country or home of supernatural or legendary creatures; fairyland," also "something incredible or fictitious," from Old French faerie "land of fairies, meeting of fairies; enchantment, magic, witchcraft, sorcery" (12c.), from fae "fay," from Latin fata "the Fates," plural of fatum "that which is ordained; destiny, fate," from PIE root *bha- (2) "to speak, tell, say." Also compare fate (n.), also fay.
In ordinary use an elf differs from a fairy only in generally seeming young, and being more often mischievous. [Century Dictionary]
But that was before Tolkien. As a type of supernatural being from late 14c. [contra Tolkien; for example "This maketh that ther been no fairyes" in "Wife of Bath's Tale"], perhaps via intermediate forms such as fairie knight "supernatural or legendary knight" (c. 1300), as in Spenser, where faeries are heroic and human-sized. As a name for the diminutive winged beings in children's stories from early 17c.
Yet I suspect that this flower-and-butterfly minuteness was also a product of "rationalization," which transformed the glamour of Elfland into mere finesse, and invisibility into a fragility that could hide in a cowslip or shrink behind a blade of grass. It seems to become fashionable soon after the great voyages had begun to make the world seem too narrow to hold both men and elves; when the magic land of Hy Breasail in the West had become the mere Brazils, the land of red-dye-wood. [J.R.R. Tolkien, "On Fairy-Stories," 1947]
Hence, figurative adjective use in reference to lightness, fineness, delicacy. Slang meaning "effeminate male homosexual" is recorded by 1895. Fairy ring, of certain fungi in grass fields (as we would explain it now), is from 1590s. Fairy godmother attested from 1820. Fossil Cretaceous sea urchins found on the English downlands were called fairy loaves, and a book from 1787 reports that "country people" in England called the stones of the old Roman roads fairy pavements.
1777, from Persian pari, from Avestan pairika. One of a race of superhuman female beings originally represented as malevolent descendants of the fallen angels, later as angelic genii (compare sense evolution of English fairy, to which it is, however, unrelated).
*bhā-; Proto-Indo-European root meaning "to speak, tell, say."
It forms all or part of: abandon; affable; anthem; antiphon; aphasia; aphonia; aphonic; apophasis; apophatic; ban (n.1) "proclamation or edict;" ban (v.); banal; bandit; banish; banlieue; banns (n.); bifarious; blame; blaspheme; blasphemy; boon (n.); cacophony; confess; contraband; defame; dysphemism; euphemism; euphony; fable; fabulous; fado; fairy; fame; famous; fandango; fatal; fate; fateful; fatuous; fay; gramophone; heterophemy; homophone; ineffable; infamous; infamy; infant; infantile; infantry; mauvais; megaphone; microphone; monophonic; nefandous; nefarious; phatic; -phone; phone (n.2) "elementary sound of a spoken language;" phoneme; phonetic; phonic; phonics; phono-; pheme; -phemia; Polyphemus; polyphony; preface; profess; profession; professional; professor; prophecy; prophet; prophetic; quadraphonic; symphony; telephone; xylophone.
It is the hypothetical source of/evidence for its existence is provided by: Greek pheme "speech, voice, utterance, a speaking, talk," phōnē "voice, sound" of a human or animal, also "tone, voice, pronunciation, speech," phanai "to speak;" Sanskrit bhanati "speaks;" Latin fari "to say," fabula "narrative, account, tale, story," fama "talk, rumor, report; reputation, public opinion; renown, reputation;" Armenian ban, bay "word, term;" Old Church Slavonic bajati "to talk, tell;" Old English boian "to boast," ben "prayer, request;" Old Irish bann "law."
name of the mischievous fairy in "A Midsummer Night's Dream," in 16c. the name of a fairy of high repute (his disguised name was Robin Goodfellow or Friar Rush), also generally, "an elf, fairy, or sprite;" probably from Middle English pouke "devil, evil spirit" (c. 1300; early 13c. in place-names), from Old English puca, pucel "goblin," which is cognate with Old Norse puki "devil, fiend," a word of unknown origin (compare pug). Celtic origins also have been proposed.