The Collaborative International Dictionary of English v.0.48:

folktale \folktale\, folk tale \folk tale\n.
   a tale circulated by word of mouth among the common folk,
   especially one forming part of the tradition of a culture.
   [WordNet 1.5 +PJC]

WordNet (r) 3.0 (2006):

folk tale
    n 1: a tale circulated by word of mouth among the common folk
         [syn: folktale, folk tale]