I love to daydream. I have different novels in my head with different versions of each. Some of the "novels" i can daydream for years...always expanding, always making different versions. While it is not wrong to daydream (God did give us an imagination), daydreams can hurt you for a few reasons:
1) Sinful daydreams: sexually, morally...
2) Becoming obsessive about it: daydreaming all day, everyday
3) Going to daydreams for instant pleasure: sexually or otherwise
All 3 can lead us away from God:
The first reason is probably the most common as it is easy to have thoughts that are sinful.
The second reason is hard. While it is fun to daydream, if it is all you do you can't function in an earthly and/or spiritual way.
The third it dangerous too. Instead of trusting God with our sorrows and happiness we go to daydreams to give us instant pleasure. Lets face it, it is easier to find joy in the wild imagination of our minds then God. However, it is fleeting and unfulfilling in the end. We have to fight to have true peace in God because to have true peace in God we can't be living in willful sin. (Though sometimes when we have no strength left, God sometimes gives us a peace beyond understanding. But I'm talking generally speaking.)
I am guilty of all three:
My mind sometimes goes where it should not go and I think about the most horrendous of evils(in God's eyes, maybe not the worlds) because it sometimes gives me "happiness".
I daydream ALL the times where it interferes with my relationship with God and others.
When ever I am sad or angry or need to escape I go to my daydream world. I pray and then daydream. Some trust in God huh.
It is hard to find that thin line between daydreaming for fun and the devil using your daydreams as a way to damage your relationship with God. We have to be careful because satan uses our God given gifts (imagination, etc.) against us.