How can I remove a folder that no longer exists from my Finder sidebar in Lion?
I was having the same issue and here's what just worked for me:
Hold command, then drag it off the Favorites bar. The item will turn into a little "poof" white cloud and when you release, it'll go away! Finally!
This is how you do as described here:
To remove something from the Finder sidebar, hold Command as you drag it out.
All you have to do is click with 2 fingers on your trackpad or ctrl+click on the item and 'remove from sidebar'.