i don't know how the pets reproduce, but the sims 2 pets it's just like the normal one, i have all the expansions. just get the couple to relax in a double bed and then in one of the two, you click and select "try for baby" and the girl will soon get pregnate and TADAN!!! A BABY or get you're sim to watch the telescope and aliens will come for him/her and he/she will get pregnate from an alien.
I'd say that a wolf is an all around 'OK' pet; but you can do better.
A lot of people say bear this, bear that; bears are too common. I say get a turtle or a crab; not only will you be original, but you'll have pets with the best armor class in the game!
If you're looking for a high damage pet for PVP, go for a fast striking cat, or a boar to charge, and root, enemies.
But then again, you could stick with your wolf. If it's dying too much, you're either fighting too many mobs, or too high level mobs. Either way, if your pet gets low health, you should use your 'Mend Pet' ability. This way you can continue to kill your target while your pet receives healing effects every 3 seconds.
Hope this helped.