I think the desire for your child to read more has to come from her, not you, if she is going to use the Kindle solely for reading.
I do not have an eReader, so I will let others answer that aspect of the question. However, I do wonder if the access to definitions is going to be as helpful as is hoped. I say this because often the definitions themselves may contain unfamiliar words or concepts which could further frustrate her. ( I know that when I have to hit the dictionary, I sometimes find myself looking up a few other definitions, just so I'm certain I'm clearly understanding the meaning-- and I'm a well-read adult.)
There's also the temptation that, when reading gets to hard, to use the Kindle for other purposes. If you are fine with that, maybe? I'd also be looking at reviews from Consumer Reports and other consumer advocacy sources to find out how "kid-proof" the product is. Can it stand being dropped? Will she be responsible with it and not take it to school where it could be damaged or stolen?
If it were me, I'd encourage reading the old-fashioned way: read aloud together. Does she have The Chronicles of Narnia or something else which is written with more sophisticated language? This is a great read-aloud series. "Anne of Avonlea" is also another which offers rich language and a relatable, interesting story. There might also be some vocabulary-rich 'word of the day' calendars which would be more appropriate for kids. You could practice using a new word each day, from a list of words she wants to become more familiar with, too. A kid-friendly dictionary (not a picture dictionary, either) would be helpful.
The special ingredient in most of these suggestions, by the way, is you. A Kindle is a neat gadget, for sure, but children will acquire language through repetition, and re-reading stories will reveal some vocabulary words through context. I wonder if a child's desire for novelty will outweigh the desire for mastery and if the instant access for new material will reduce the potential for long-term learning of vocabulary.
These are just thoughts (this is something I think about a lot). My guess is that once the novelty wears off (like so many of my grown up friends and their Wii Fit, ;) ) you may be challenged with this same situation in the future.
Best wishes, whatever you choose.
oh-- and @Stitch-- I've just started reading the children's treasury of James Herriot this morning to my little guy. (He's four.) He loves it! Great pick.:)