No, this is not a contradiction in terms; not in the slightest. I suppose the root questions are, of course, the difficult ones: ‘what is fiction’ and even harder, ‘what is reality’. The former I believe is answerable, the latter, is something that fiction should try to answer. Starting with the basics, fiction is an art form consisting of a written story that either some parts or all parts are imaginary. The purpose of fiction, like any art (see To Understand Art) is to show some aspect of Truth, e.g. reality.
A good work of fiction does not have to try and show all of reality, and answer that exceptionally difficult question ‘what is reality’. Fiction should show the reader some aspect of reality, a facet of the Truth. Like the X-files says, ‘The Truth is out there.’ It is a hallmark of good fiction that it portrays some part of the truth accurately. (See ‘The Right Story Told True‘) Any fiction that succeeds is worth reading.
There, that statement is probably a bit strong for most people. But the fact is that seeing different parts of the truth helps people to see the whole Truth better. For example, if a reader only reads those things that make him comfortable he will never see the discomfort in the world. If this reader also only is exposed to politically correct history he will never find out that in almost every case mankind is terrible and vile. Even ignoring the most devilishly atrocious century in human history (that would be the 20th by the way, Hitler, Stalin, Mao, are the big three.) History is full of evil people committing horrible crimes such as cannibalism, rape, infanticide and so forth. These examples are horrible, in real life as well as in novels, but that does not make them less true. In reality though, people are evil, people have done so many abjectly horrible things that the fact of human nature should not be ignored in fiction. In many ways, the actual atrocities committed by people and governments are so many and so horrible that even the worst fiction is frequently an underplaying of the reality. This is understandable, and even necessary. However, any novel that pretends that people are not bad is lying.
So, the truth can and should be told through fiction. These antagonists and protagonists in the story should be the kind of people they really were in history. The characters should be true to their personalities. The people should talk like people really talk, and the book must follow the rules set out for its world.