Fairy Dust is a consumable item that is used to restore skill points to maximum. It can be bought from stores or from the Dust Merchant. You can also get it for free from Mystery Boxes. Its price in stores depends on the maximum skill points of the player, from the Dust Merchant it can be bought for half price.
The Dust Merchant used to give useless wood dust occasionally, but no longer. Since the Hell Unleashed expansion, you always get Fairy Dust.