I assumed his deterioration in form (that was already well underway when Mourinho dropped him) was down to him being primarily a "reflex" keeper. He was getting older and according to Mourinho he wasn't training hard enough to maintain his agility, and didn't have enough other positional strengths to make up for it.
However, as the Dortmund match and some of Madrid's other cup games showed, a lot of his reflex save ability came back - he admits himself he had to train hard to do that.
This run of errors he's in now though, it seems like a mental issue. Maybe too much pressure for too long? Maybe the strain of fighting to be first choice? Maybe his mind's elsewhere, on his wife and baby perhaps? Whatever started it, I think his confidence has collapsed. All keepers make mistakes, the difference between the good and the great is how they respond and whether they let it affect their performance, in that game, or in the next one.
I honestly don't think confidence affects a goalkeeper's ability as much as it does an outfield player's. They don't have to 'try' things like taking on players or going for goal, which an outfield player wouldn't do if low on confidence. I'm not saying keepers have it stress free but even if Casillas is low on confidence it's due to his natural decline in my opinion.
Not necessarily. VdS had a rough time at Juventus. He joined them as a world class 29 year old and two years later after errors and disappointments, he was out. He said his confidence was gone. He needed 4 years with Fulham to get back to his peak again. The rest, as they say, is history.
He's getting a rough ride in the Madrid press today. Even previously loyal journalists are saying that he can't be first choice keeper any more. Even previously loyal fans are saying that he deserves a nice well-paid, low pressure job (like Monaco) rather than the risking losing his legend status at Madrid.