Fantasy— the Literature of Alienation?

So the other week I was at the Jemez Symposium with Steve Donaldson and Jane Lindskold, and our interlocutor asked, “So what is this ‘fantasy,’ exactly?” Or words to that effect.

I came up with a rather boiletplate answer, that while SF’s contract with the reader was “What you’re about to read is possible (however unlikely),” the contract for fantasy was, “We are all agreed that what we’re about to read is flat impossible, but will be interesting for other reasons.”

Steve said (and I’m quoting from memory here, so I could get elements of this this wrong) that fantasy was a literature of alienation. In his view, there is a line of tension between the protagonist and the frankly impossible things that are going on around him/her, and that the fantasist plays on this tension for all it’s worth.

Of course that’s what the Covenant books are about, more or less explicitly.

Steve’s theory seems to leave out the reader, who while submerged in the text is equally surrounded by impossible events. So if there’s any alienation or tension going on, the reader is equally a part of it.

But is there necessarily alienation? A fantasy reader reads specifically for the impossible stuff: he/she may not be alienated from it at all.

Is alienation necessary in fantasy? Is it a literature of alienation?

Discuss.