The sites  directory is used to specify which sites are searched as a result of the sites content source.

So, yes, removing the sites area  does mess up searching  'cos you remove  the sites directory as well.

If you really don't want the sites area, you could start manually adding additional content sources for searching but that could start to get tedious.

Let me add, and adding back a new Sites Directory Area that looks the same
as the original doesn't solve the search  problem. Only the original Area
named Sites will be searched along with Portal content.

The sites  directory does two things: it provides you an opportunity to build a taxonomy for your sites and site collections. In addition, when a site is created through the sites directory area, the *root* site in the site collection is automatically added to the portal  listings for portal search.

If you want to operate without a sites directory – you can – but you’ll then need to create content sources to each site collection in order for the site content to appear in the portal indexes.

Can I make the homepage the Sites Root?

Not that I know of.................

But it could be a single click away. You could potentially use the Site
Collection Web Parts to display recently created Site Collections and Site
Collections the current user has created. However, that may require
modifying the underlying Home Page Site Definition.

It should work if you are able to recreate the Sites area  with the same original name. Unfortunately, if you fall foul of the bucket webs, you could end up with /C3/SiteDirectory and that won't work. So if you want to recreate the Sites listing, it has to (a) be called SiteDirectory and (b) exist at the top level.

And then the site collections need to be manually added back into the portal  listings for the new site directory too……….

Is there any way of showing the sites  under the /sites directory like
you would areas when changing the catid of the CategoryNavigationWebPart.
Ex.
msdn.microsoft.com/.../h\
tml/ODC_SPSCustomizingSharePointSites1.asp