I think that it's important that you speak to the school again. A lot depends on where you are and what gifted services are offered/required. Don't focus on "the gifted program." Focus on what is the school district's policy on gifted children. Spend some time on their website, and perhaps talk to the gifted coordinator for the district (could be under another title- director of curriculum, or student services, but just ask who handles gifted services). Our school district also starts later (3rd grade) but they have a stated policy saying what they'll do for students in the top 1%, 5%, etc... If your dd is in guided level Z in FP, she is a great reader. Our school actually stops at U, and this may be what the other teacher meant by "wxyz" (some schools consider anything above U or V to be about the same, and as high as they'll need in elementary school). Talk to them about different assessment like the Gates Macginitie or others for reading, so that you can track your dd's progress. I don't think it's necessarily important that she is always reading at her level or constantly progressing, but I do think that having her work with lower-level groups on flashcards is RIDICULOUS. I know not every parent feels that way, but my child should be learning at school, not being a teacher. Sometimes explaining a concept to other kids can cement it for a child, but really, your child will get NOTHING out of doing the Dolch sight words flashcard list.... If her reading is so high, can she work on writing, research, doing PPT presentations for the class on a subject, doing book reports, etc... anything that would actually be helping her learn and grow??
Are there any other kids with whom she can work? I realize that no one is probably at her level, but there is work at lower levels that would likely be appropriate (I always think of when I taught Junior Great Books and we used nursery rhymes... easy passages can still be used for deeper thinking).
Think about doing the EXPLORE as soon as she hits 3rd grade, because it is likely that even the gifted program won't be enough for her and you'll want some support/evidence when you talk to the school. The EXPLORE is a lot cheaper than outside full-spectrum testing and schools seem to respond better to achievement testing (like EXPLORE) than ability testing (like an IQ test).
Only you know if she would be a good candidate for acceleration. I have two dds who graduated HS at a younger age- one was somewhat difficult (but not sure if there was a better option) and one I can't even imagine her being in the younger grade (and she's now on track to graduate college early as well). However, my boys were not grade-accelerated and even though we've had to work on subject acceleration and enrichment, I'm very happy with our decision to keep them with their same-age peers.
It's a hard decision, but I'd read up about it and look at the Iowa Acceleration Scale and think about how that might work for your dd. Try to work with the principal or school district if at all possible instead of the classroom teacher, or you'll face the same issues next year. What changed things for us was making that move- so that each year they (principal and district) facilitated accommodations for the next year, instead of us wasting three months at the beginning of each year with a new teacher.

Anyway, I've babbled on long enough... good luck!
Theresa