Take every opportunity to read to her orally so she falls in love with reading and sounds, rhyming and story line. Only have her practice reading in books that are her level so she can feel successful. Have her read to others; pets, siblings, grandparents, etc. Praise, praise, praise!

I would suggest "Teach your child to read in 100 easy lessons"; I'm using that with my Kindergartener and it's GREAT.   My oldest struggled with reading and what helped him was telling him that each word had a pattern of SOUNDS and all he had to do was say the sounds in the proper order.   You might want to check out "All about Reading from All About learning press.  It is a homeschool curriculum, but you can probably use it with her outside of school.   I haven't used this program for reading, but I use it for spelling.  

The link for Teach You Child to read.... has some great reviews and an excerpt on the steps used.   Hope this helps.

Have your grandchild see a developmental optometrist for a complete eye exam.  You can find one in your area by going to COVD.org ( college of optometrists in vision development) or going to the OEPF.org website.  Many times, a bright child with difficulty in reading has to do with how their eyes team together in tracking and reading eye movements.  It is also important to be able to develop a picture in your head ( visualization ) while reading to comprehend the story and this is also related to how the eyes are working and processing information.

she needs to be tested for a learning disability.
Many children who are very smart can a have problem with reading.
your school is not going to say lets have her tested you need to demand it.

Where I live the schools do not teach phonics anymore.  I agree that 100 easy lessons is a good program.  You can get it pretty cheap on Ebay.  There is also a DVD from LeapFrog called Letter Factory and one called Talking words factory.  I highly recommend those for starters.

try to let her read at a 4 gr. level and have her parents heard about it and if they did not tell them so they could take her to the library

Get her outside help even if you have to pay for it. I was in the same spot with my son and it was hard for the whole family. He was entering 2nd grade at a mid Kindergarten level. The system his school used is called DI (direct instruction) and after looking at it I realized it's awful. We put him in Sylvan for the summer and he excelled. It cost a good bit, but he went up an entire grade level in 48 hours (6 hours a week for 8 weeks). It took the whole summer, but he was very proud of himself. I thought great we're over the hump and can work hard this school year and continue to catch up. That was not the case. He spent this year with no progress. The school has my child for 7 hours a day and can't make any progress?? I bought "The Logic of English" teacher's manual and workbook and pulled him out of school for the rest of this year. We've started at the beginning and are working on it every day. He's doing much better and his confidence is coming back. We are all happier and I've learned quite a bit. I understand not everyone can do that. The problem isn't how your child learns. It's they aren't teaching to your child in a way she can learn.