Are they looking for the truth or for reassurance to keep believing? A good way in which to determine this is to ask questions such as, "Why do you ask?" and "What do you think?" Then ask how they feel about their responses. If it seems as though they are ready for the truth, give it to them. However, if they appear to be hoping to hold on to the story a bit longer, keep it going by simply explaining, "Well, I absolutely believe in the magic of the Tooth Fairy!"
Also, consider their age. A preschooler telling other children in the sandbox that there is no Tooth Fairy is going to cause social issues, as will a child in middle school who still believes. Sometimes it is necessary to gauge your response by the impact that continued belief will have on your child when among peers.