Excerpts From  http://www.grist.org/advice/ask/2006/10/18/dryer-sheets/index.html?source=umbra :

"You've been programmed to use them since the day your parents forced you to start doing your own laundry. Put the clothes in the dryer, then toss in one of those springtime-fresh fabric sheets to make them come out all soft and static-free. Sounds so cuddly! But you're actually coating your clothes in a chemical cocktail, says advice maven Umbra Fisk, who suggests some alternatives."

"...the contents of mainstream dryer sheets can indeed be rather toxic. Unfortunately, we don't actually know everything that's in them, since the contents are treated as trade secrets by the manufacturers. But a few ingredients that have been identified in some formulations are benzyl acetate, limonene, and chloroform. Individually, these chemicals have been linked to cancer, and it's not likely they've been studied much in combination.

...The good news is that dryer sheets and their cousins, fabric softeners, are not at all necessary.

 ...Natural-fiber clothing typically doesn't create much static electricity while tumbling about in the dryer, making the static-fighting function of dryer sheets and fabric softeners unnecessary. And you can soften clothes yourself at home or at the Laundromat with natural alternatives. While you're washing, try adding baking soda during the rinse cycle or white vinegar during the wash cycle (but don't use vinegar if you're also using bleach, another toxic favorite).*

If dousing your clothes in vinegar sounds like too much of a stretch from your current routine, there are much-less-scary natural varieties of fabric softener widely available.

...Finally, recall that clotheslines, drying racks, and the like are the best eco-options anyway. Or try a combination: getting your clothes mostly dry in the dryer and then hanging them up to dry the rest of the way can reduce static cling while simultaneously decreasing both the energy used during drying and the necessary hang-drying time."