Most big fantasy settings are set in medieval European inspired settings, so it's what people are familiar with. Knights, kingdoms, and dragons and the lot are easy to conjure up in the mind compared to say Mamluks, Caliphates, and sphinxes for a lot of people. Usually when people read the word fantasy as a descriptor, Westeros, Middle Earth, Tamriel, and countless others come to mind, most with heavy European slants. Sure, a lot have Middle Eastern inspired places (Dorne in ASoIaF, Hammerfell in The Elder Scrolls, for instance) but we seldom see much of those places so they aren't immediately what come to mind. People like to roleplay what they're familiar with, so it doesn't surprise me that Arabian inspired settings aren't very common. I'm sure if you looked at an Arabic roleplaying site, their fantasy games would probably have a lot more settings reflecting Sinbad the Sailor, among others. 

It isn't that people are "afraid" of Arabs as much as it's not something people are familiar with. it's also the reason you don't really see anything having to do with Chinese mythology in the vein of Jade Empire, that excellent BioWare RPG, because people really don't know much about that kind of setting.