Any sufficiently bright lightsource can damage the camera internals (not just the sensor, the shutter curtains can heat up and deform). However the sparks from an arc welder are very brief so they don't transfer that much heat energy. I wont say you couldn't damage the camera but it seems less likely than for example photographing the sun, which is a continuous light source. If you want to be on the safe side you can use an ND filter on the lens to absorb some of the light. See this question for more information: Can the sun damage the camera sensor? Under what conditions?
I would just experiment with lots of different settings, you probably want a longish shutter to get nice arcs. It might look good if the sparks start in focus and transition to out of focus so I'd use a variety of apertures and just see what looks good.
I would not advise welding in front of lens for longer than necessary, even with shutter closed (you could heat and malform it - while it's not on focusing plane, better safe than sorry). Given that there are photos of welding on Google Image Search that seem to be taken in usual ambient lighting, a short exposure should be okay. Authors claiming to have taken such shots in relevantthreads also seem to agree that no filters are necessary.
Assuming you want to expose other parts of your photo correctly, the actual welding point is going to be overexposed anyway and you could leave that behind some little detail in front. The welding point is going to be recognizable by the glow.
Regarding using a filter, the situation is tricky. There are going to be sparks, so you'll want to use a protective filter when shooting from close distance. But also, there is a light source in the frame, which would create extra flare with a filter - so another option to try is a longer focal length without filter from a safe distance.
If you want to expose for the arc, I'm afraid you don't have much choice but to use a tight aperture (to cut down brightness) and a short shutter speed (to freeze the arc). But you don't have to worry for bokeh, because you won't have anything bright enough in the background anyway. Luminance varies faster than your camera can meter, so use manual settings, take multiple shots and adjust according to how most of the shots appear to be exposed.
Some more thoughts, not directly asked in question:
A good moment for photographing welding point is right after the act, while the welding rod and metal are still hot and glowing.
While welding is a very bright light source, the luminance it creates falls off pretty fast with distance in accordance with inverse square law. You might want to use some diffused flash to bring out the welder's face, gelled to match ambient light or slightly more blue (to hint reflection from welding).
We do video and photography of weld spot with electron beam welders and lasers. We use very bright background lights to reduce the contrast between the super bright spot and the metal around it which is what we need to see. Use very bright background light and ND filter to dumb it all down. You won't harm your ccd if you shoot through a prism or use a mirror. This helps with depth of field in maco as well. Using this method you can see the object and the weld point. This is an industrial answer I knoqw. Questions about video or very hot and bright object photography and video can be sent to me at email@example.com I can not supply pix or video due to the nature of the work we do.
You can do this for photography by taking two shots lights on lights off and combine them. What will not work is using things like welders glass or filters alone. Completely unusable.
For basic shots not close ups just make sure your camera is in spot focus not broad focus and lock on the area of the frame that is away from the weld. You'll get a great pic.
By the way it's the infrared you have to be concerned about not just light. That's where the heat comes from. Bright light just saturates the ccd it's the heat you need to consider.
Here's one suggestion that may work ... ask the artist to get in a comfortable pose with the welding torch in place, then as the welding torch causes a spark take one shot with a piece of welders glass in front of the lens. Next the welder stops the torch but doesn't move and take a normal shot without the welders glass.
You will then have one of the normal image and one with the sparks that should be fairly nicely visible but everything else dark. Now use something like Photomatix to HDR the two images and you will be effectively overlaying the sparks on to a normally exposed image.
May take a little practice to get the exposure correct with the welding sparks in play and the welders glass in front, but no doubt the results will be worth it. Good luck!
Exposing the arc to the sensor for long can damage the sensor. Also, keeping it close to the sparks can damage the camera body and the lens glass also.
Regarding the shooting of arcs the following situations arise
Just the Sparks: You can either fit a welding glass filter on your lens or use a low ISO and fast shutter combination. (I'd prefer the first). With the welding glass, the colours might become different from original - post-processing would do.
HDR: Although tricky due to the random nature of the sparks, you can still give it a shot by using a tripod and telling your companion to stay still. This out to give you better results and you might be able to capture both the sparks as well as the surroundings effectively
Flash: One flash spots directly at the welder (maybe at full power) and the other behind the welder (facing the camera, at lower power). Although this would black out the surroundings in which case you could use some daylight.
Photoshopping: Although not really bad, you could take a shot of the glowing metal just when the sparks end, as suggested by Imre. And shoot the sparks separately and process them as one. Tricky, but just a suggestion.
When I was in welding class, the instructor said that gas (oxy/acetylene) welding can be done with moderately dark shields, but that arc and related (mig, tig, etc.) need very dark shields. He also said that you can hurt your eyes looking at arc welding from fairly long distances, being 100 feet away does not mean you can safely stare at the weld.
David Hobby's DVD has a nice section on shooting a blacksmith. As with welding, the blacksmith gets the iron/steel to white hot, which makes everything else go dark. So you need a fair amount of flash or ambient to keep the dynamic range down to what a camera sensor can cover.
You might want to try strong constant lighting rather than flash (i.e. lighting for filming), that way you could set up the scene so that it is very bright but with strong shadows to give it more 'depth' and the actual welding wouldn't be as overpowering. This would also mean that you could minimise exposure length and thus risk of damage to the camera.
Getting up close to the welding is definitely to be avoided, this is why there are zoom lenses.
You might also want to consider filming some of the process as well.