The windings on the fan could have opened up or the power header the fan plugs into could have went out. The bearings could have froze, but you'd probably hear that coming before it actually happened. If it's under warranty, RMA it. If it's not, then just remove the PS, open it up, and stick another fan in it. If you have a DMM and know how to use it, you can ohm test the fan and power test the fan's plug. That'll quickly tell you where the problem lies.
Is it damaging? Probably not. Hopefully you're not relying on the PS fan to cool your whole sysem. If you are, then you may have other problems waiting to happen.....