Dire wolves died off with the rest of the megafauna during the last ice age. Smaller members of the old species required fewer scarce calories to survive, so everything big got small or died off.

As for the wolf > dog > abomination path, artificial selection is significantly faster than natural selection. If you look at the Russian fox experiments, it took about 50 years to create a domesticated breed of fox. That's a single human lifetime to change the nature of a creature - in another hundred years, they might be able to create a fox that doesn't stink, and then it would be pet-ready.