Given the current mainstream media's tendencies for over-hyped sensationalism, biased inclinations against the video-game industry in general, and the constant demands of PETA's attention whoring usually being satisfied, I'd have no doubt if concerns were drawn to a Nintendog character's playability in a fighting game, there will be an overblown situation that would result in bad publicity for all involved.
Herein is where the issue truly lies: if PETA draws the attention of the media towards the Nintendog in Super Smash Brothers, not only will it turn into a media circus act against Nintendo, but it may also draw the attention of other animal rights advocacy groups. They will be the harbingers of reason that media organizations will actually listen to as authorities on this matter, and soon enough Nintendo will have it's family-friendly reputation at stake.
Are there double standards held for categorical differences between human beings being violently injured (Link, Sheik, Snake, Ness) and animals being violently injured (Pikachu)? It's certainly debatable, and I would actually agree it is hypocritical. Whether you believe it to be so or not, there will be reactionary arguments involved between both parties, and Masahiro Sakurai would do well to avoid such an incident. There are several members on this board who would already feel uncomfortable with this idea for this very reason. Again, it may be hypocritical, but that's the way it is.
Considering PETA has once awarded Nintendogs their Best Animal-Friendly Video Game 2006, they are very much aware of their existence. Put a Nintendog in a fighting game as a playable character, and you'll have PETA hot on Nintendo's ass like a Doberman chasing a steak, bringing along all the other animal rights advocacy groups. No good will come from this, only bad publicity.
Am I saying these events will play out as accordingly? No, not exactly - if it turns out I'm wrong, I will admit as such. Yet, I'd rather play it safe then be sorry.
Even then, why would anybody want to include a boring, bland, banal Nintendog in the first place? Because we need to represent a series simply for the sake of representation?
Considering the limitations on newcomers this time around, it would be a slot-wasting detritus of a lackluster character, especially one that would instill no excitement nor anticipation - simply all because it is a milquetoast, nothing-special, run-of-the-mill dog. Family-friendly or not, there is a whole character roster selection that would provide the satisfactory needs of a casual family game night - Nintendogs won't change this.
A supporting role as an Assist Trophy is more than accommodating enough.
Could you also provide me sources as to these "realistic cute animal" fighting games you speak of? It would assist me in assessing the situation.