There's no doubt running a fuel pump dry can kill it, but thats not the failure mode in the D2. It just wears out and stops working.
Yes, the tank balancing is a jet pump. Audi call it 'suction jet' - its basically fuel flowing through a venturi (powered by the extra outlet on the pump). There's a suction jet in each side of the tank and the flow of fuel through the venturis, plus atmospheric pressure makes them balance out the level like a siphon. When there is no flow (because of the wrong pump, or the right pump fitted without seating the outlet spigot properly) this balancing doesn't work.
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