My DS is 5 years 10 months now and read just like your DD for over a year! It was annoying, ridiculous and so time consuming. He'd sound out t-h-e every single time. He knew it was "the" out of a sentence, but in a sentence? He would get stuck.
However, it was like a magic light bulb turned on in his brain about 4 months ago. Suddenly he had a base of about 300 sight words and just took off. We started a "Word Wall" of words he could read without sounding out. I don't know if it helped the problem, or gave him a motivation to get over it himself. But if we'd come across a word that he read without sounding out, we put it on the wall. He started asking "is that one going on the wall!!"
Now our wall has crazy words like last night's additions: migration, species, ecosystem and Sahara Desert.
I don't know for sure, but I believe a large part of it was his strong tendency to perfectionism. If you sound it out to make sure you're right, you're less likely to make a mistake.
