Dude... that's just really, really cool, and a really cruel trick to play on PCs.
One question though, is there a precedent in the real world for people fearing things to this extent? Would not diminish this if there wasn't, I'm just curious.
You should make a monster to go along with this. Some kinda super-boggart thing that makes use of the Rabid condition.
How do you keep coming up with such cool, unique, and really, really fun/scary things, anyhow?