The Fairy Tale Country is Chapter 25 of Tsubasa: Reservoir Chronicles.
In a crowded tavern, the group is sitting around a table. Fai states that they stand out because of their clothing. But they have a bigger problem: they have no money! Fai tells him not to worry; pointing out that Sakura is on a winning streak in cards. After being undefeated, she is suspected of cheating. Fai informs the men that he does not have the time to cheat, and if they'd like to accuse them of cheating that they take it up with Kurogane. The men then quickly apologize for their accusations.
Back at the table, a large man with a mustache brings their drinks. He asks them if they're tourists, citing their strange clothing as an indication. Syaoran says they're looking for something. The man then gives them a healthy piece of advice: do not go north. There is a terrifying legend in the northern part of the country. Syaoran, intrigued, asks for more information. The man explains that long ago a beautiful princess with golden hair lived in the north. One day, a bird flew to the princess and gave her a feather, saying that it would give her mysterious powers. After she obtained the feather, the king and queen died suddenly. The princess became the master of the castle. Mysteriously, the town's children started to disappear into the castle, never to be seen again.
Syaoran, thinking the feather in the tale may be one of Sakura's, asks if that castle truly exists. The man says yes but mentions that the story is over three hundred years old and that the castle should be in ruins. Despite this fact, children have started disappearing once more. (Note: Recalling Yuko's speech in volume one and a lesson learned in an earlier chapitre, time can flow differently between dimensions.)
The group, now dressed in the clothing of the time era (think of the renaissance period), heads for the northern country on horseback. As they venture, they discuss where they each came from. The cold weather doesn't seem to affect anyone in particular, as each of them has experienced cold before. Just then, they reach a wooden sign engraved with a word. To Sakura's delight, Syaoran is able to read the sign. It says "Spirit." Beyond the sign is a small village. As they make their way into the village, shadowy figures peer at them from within the houses. Eerily poised behind window blinds, these people look do not look very inviting.