I think playing tug is fine as long as it is a game with very specific rules. Only play with a specific toy, dog does not go for the toy until given the tug command, dog MUST release the toy the instant you say to, and teeth must never contact human flesh (even accidental will end the game). You always start the game, and you always end the game. On a really assertive, dominant type dog I would always win the game. On a soft submissive dog that you are trying to boost confidence on it can work well to let them win sometimes but I still would always win the last time before we stop.
Some dogs never really get into it, but for the ones that do it can be used as a really good reward - I have used it as a "jackpot" in obedience work etc - the dog nails something difficult and I whip out the tug toy (which had been hidden on me) and we have a tug party for a minute or so! Then the toy gets hidden and we go back to work.
I do not believe that playing tug as a strict game with very specific rules encourages hard mouth or bad retrieving habits. But playing tug without rules might....
