I've got to agree on the "bad situation all around" front - but I must disagree on the "everyone was at fault" mentality.
I feel bad for the kid and feel bad for the kid's family for the guilt they are probably dealing with over the consequences of having let their kid out of sight for a matter of seconds. That said, it upsets me that the dog owners are being blamed at all in this situation considering that the dog was on its own property and had no history of aggression and considering that no one has a clue what exactly transpired before the child was bitten.
The dog was restrained on its own property. It was not known to be "dangerous." While I think leaving a dog tethered unattended is not the world's smartest decision, I don't think that it is grounds for the family to have their dog (legally their property) destroyed. If I have a grill and the neighbor kid comes into my yard and turns the thing on and then climbs on top of it and suffers serious burns, is that my fault? Even if the child was too young to know better?
Or if I had a pond in my backyard and your kid wandered onto my property and drowned, I would be hard-pressed to field the guilt. I understand that in our "sue happy" legal system, people DO try (and succeed) to place blame on the third party on account of their own actions, but I believe that this mentality is approaching a very slippery slope towards an immoral justice system.
I have other issues with the situation and the dog owners hardly sound like exemplary owners, but in this situation, I think that the parents of the child were at fault. If the scenario involved a purebred, normally friendly, pregnant dog with amazing owners who left it for five minutes alone in their fully fenced yard while they ran inside to use the bathroom...... then the story transpires as it started (except with the toddler letting himself in through the gate and then grabbing the dog's tail)... do your opinions change? I don't think that any of the adjustments are relevant to the actual situation at hand, so I tend to believe that in both situations, the child's parent was at fault.
If my dog were to run into a neighbor's yard and get taunted/hurt by the neighbor child who was too young to know better (or dog), that would be MY fault. I would be pissed, no doubt, but the bottom line is that I didn't have control over my dog and he was on somebody else's property. The situation would be different of course if the harm was enacted by a human with malicious intent, but I think that most would agree that neither dogs nor very young children have true "malicious" intent in the way that we tend to think of the word.