I've never heard anything about de killing bacteria (or any other microbes), and I don't really see how that would work anyway as it just doesn't make sense biologically... However, it does have a drying effect on litter to some degree (it absorbs moisture), which perhaps WOULD tend to limit or suppress microbial activity in the litter--so maybe that's where this idea got started (just a guess though).
You do want to avoid inhaling it or getting it in your eyes etc. but only because it's micro-abrasive and therefore irritating, not because it's toxic--it's just silica, like sand.
DE is used in livestock feeds (generally not to exceed 2%, if I recall). It's used as an anti caking agent. The feed I buy also has de in it, on the ingredients list. I don't believe it has any value as a dewormer (again, just doesn't make any sense) but it is very effective for ectoparasites, either applied to the litter, or directly to the chickens skin in extreme cases (just remember it tends to have a drying effect on the litter, which can be good or bad depending).
Also, the de used in feed and litter, and the kind you use around the garden are the same thing--food grade de, diatomaceous earth, sometimes called fossil shell flour. Very handy multipurpose thing to keep around, kind of like baking soda. As far as I know the only other kind is something used in pool filters...