Following on from Nick's comments, we should also bear in mind that the way folk songs are often presented by revival folk singers is frequently just as far removed from traditional styles of singing as classical arrangements. It is just that folkies have come to accept this as normal and proper, and find other ways of interpreting them to be wrong.

I think the crucial difference is that classical composers regard the source folk song simply as a foundation upon which to create their own work of art, and their aim is to display their musical ideas and the vocal abilities of the singer. The folk singer on the other hand is usually interested in finding a way to display the song itself to its best advantage. If your prime interest is in the song, then naturally the composer's approach, no matter how beautiful (which comes down to personal taste), will feel wrong and perhpas disrespectful to the material, but neither approach is intrinsically better than the other, they are trying to do different things in different ways.