To get started, you might try browsing through some projects to see what students have done in the past with their Storybooks based on fairy tales. The key thing is to find a focus since there are thousands of fairy tales and nursery rhymes to choose from. So, you could focus on a specific type of character, a specific type of plot, or a specific theme of some kind. You could choose fairy tales that have the same setting, or you could choose fairy tales that come from the same cultural tradition. You will be choosing just four stories to include in your project, so it is essential that you have some kind of focus that will help you to choose four stories that are connected together in some way.
Fairy Tales v. Nursery Rhymes. One thing about fairy tales is that they are often long, even very long. If you prefer instead to start with a source story that is very short, you might consider doing nursery rhymes instead. Because the nursery rhymes are so short to begin with, that gives you more space for your imagination to run wild! Here are some Storybooks about nursery rhymes that students have done in the past.
Online Resources: Fairy Tales. You can find lots of famous fairy tale collections online, such as the Brothers Grimm or Hans Christian Andersen. The Sur La Lune Fairy Tale website is a great place to browse, as are the Andrew Lang Fairy Books. Check out the Online Books pages to find fairy tales from different regions of the world (Celtic fairy tales, Russian fairy tales, etc.), and also be sure look at the Anthologies list to find fairy tale books that bring together stories from different countries.
Comparative Fairy Tales. If you are interested in comparing different versions of famous stories, the Dan Ashliman website is the place to go for multiple versions of famous fairy tales such as Bearskin, Beauty and the Beast, Bluebeard, Cinderella , King Thrushbeard, Rapunzel, Robber Bridegroom, Rumpelstiltskin, Sleeping Beauty, Snow-Maiden, Snow White, and The Swan-Maidens. If you do want to work with a classic type of story that is already familiar to your readers, you can get your readers' attention by telling an UN-Disney version of the story... and there are Cinderella stories form all around the world!
Online Resources: Nursery Rhymes. You can find a wonderful edition of Mother Goose here: The Real Mother Goose by Blanche Fisher Wright (also as a Kindle ebook), plus there are many more collections of nursery rhymes at Google Books and other online book sources.
Illustrations. The Sur La Lune website is also a great location both for fairy tale books and for airy tale illustrations, and many of the fairy tale books at Project Gutenberg and at Sacred Texts Archive contain the original book illustrations. Of all the famous illustrators, Walter Crane is my favorite. Here is one of his illustrations for The Frog Prince: