Diatomaceous Earth is generally safe. The concerns with DE are that it can cause skin and lung irritation if the animal (or human) experiences prolonged exposure (for example, if you dust your house in DE and don't clean it up, or leave it in the pet bed for a month). The lung irritation from DE is generally not persistant, but I would be sure to protect my pet from long term exposure, especially if they had an existing lung condition.
Diatomaceous Earth can be safely eaten (there are a ton of these studies, so here is one).
Toxicology and Applied Pharmacology
Volume 6, Issue 3, May 1964, Pages 284–291
"The effect of ingestion of diatomaceous earth in white rats: A subacute toxicity test"
Eldridge M. Bertke
Science Direct Abstract
The effects of 5% diatomaceous earth in the diet fed to white rats
over a 90-day period indicated no mechanical or chemical damage to the
tissues.
There was no significant increase in the percentage of residual silica
in liver, kidneys, and spleens of the test animals.
Diatomaceous Earth can reside in the lungs and cause irritation, but this is recoverable
In many of these studies, Diatomaceous Earth is referred to as Amorphous Silica and is compared to Crystalline Silica. CS is a known carcinogen, while AS is safe. However, most AS is contaiminated with small amounts of CS. In food grade DE, the amount of CS allowed is controlled to ensure that it doesn't become too much.
Arch Toxicol. 2002 Jan;75(11-12):625-34.
Health hazards due to the inhalation of amorphous silica.
Merget R1, Bauer T, Küpper HU, Philippou S, Bauer HD, Breitstadt R, Bruening T.
NIH Abstract
The major problem in the assessment of health effects of amorphous
silica is its contamination with crystalline silica. This applies
particularly to well-documented pneumoconiosis among diatomaceous
earth workers. Intentionally manufactured synthetic amorphous silicas
are without contamination of crystalline silica.
Animal inhalation studies with intentionally manufactured synthetic
amorphous silica showed at least partially reversible inflammation,
granuloma formation and emphysema, but no progressive fibrosis of the
lungs.
In the next study, Synthetic Amorphous Silica was used (so, no Crystalline Silica contaimination, this is not what the effects of DE would look like). Even the CS exposures showed no clinical signs to an acute exposure (and we know that CS is carcinogenic). In addition, even the "safe" SAS (again, no CS contaimination) produced some lung changes that were viewable by necroscopy. I would be cautious using DE around an animal with already compromised lung function after reviewing this study.
Food Chem Toxicol. 2007 Oct;45(10):1856-67. Epub 2007 Apr 14.
Five-day inhalation toxicity study of three types of synthetic amorphous silicas in Wistar rats and post-exposure evaluations for up to 3 months.
Arts JH1, Muijser H, Duistermaat E, Junker K, Kuper CF.
NIH Abstract
Rats were exposed nose-only to concentrations of 1, 5 or 25mg/m(3) of
one of the SAS 6h a day for five consecutive days. Positive controls
were exposed to 25mg/m(3) crystalline silica (quartz dust), negative
controls to clean air. Animals were necropsied the day after the last
exposure or 1 or 3 months later. All exposures were tolerated without
serious clinical effects, changes in body weight or food intake.
Exposure to all three SAS at 25mg/m(3) induced elevations in
biomarkers of cytotoxicity in bronchoalveolar lavage fluid (BALf),
increases in lung and tracheobronchial lymph node weight and
histopathological lung changes 1-day post-exposure. Exposure to all
three SAS at 5mg/m(3) induced histopathological changes and changes in
BALf only. With all three SAS these effects were transient and, with
the exception of slight histopathological lung changes at the higher
exposure levels, were reversible during the 3-month recovery period.
No adverse changes were observed in animals exposed to any of the SAS
at 1mg/m(3)
National Pesticide Information Center asserts the following, but I have been unable to find the study supporting this assertion in their references (I have not read all of the long ones).
When mice were forced to breathe diatomaceous earth for one hour each
day for a year, there was an increase in lung cancers.