Kym had pneumonia. The decision to replace her, temporarily, with Michala Banas was because Libby is going to be in some quite important storylines, so rather than write her out with an implausible reason, they drafted in the replacement.
Michala will be in Neighbours for approximately 4 weeks. She finishes in the 2008 Australia season finale (shown in Australia just before Christmas) and Kym returns in the 2009 season opener. Here in the UK, we're unlikely to get the 4 week break so we'll get the finale one day and the opener the next (possibly with a weekend separating them if the finale episode happens to fall on a Friday).
Many Australian fans on the Neighbours forum really warmed to Michala (who has Libby's mannerisms down to a T) and soon accepted the temporary change.
In Australia, Kym's illness was well publicised - it's a shame the voiceover (by Jackie Woodbourne - who plays Susan Kennedy) didn't say "Due to illness... before saying ...in today's episode, the role of Libby Kennedy is played by Michala Banas, which might have made things clearer for the UK viewers.
As for Libby and Dan's scenes, the actor who plays Dan (I've temporarily forgotten the actor's name!) and Michala had lead roles in another Aus soap called McLeod's Daughters, where they played a couple (who like Libby and Dan had a will-they-won't-they storyline for some time), so they actors actually do have on-screen chemistry.