This is so incredibly sad to hear. Makes my heart ache. Poor little girl, and her poor poor parents to have to go through this sadness and hardship.

As to telling your daughter, I do believe you should tell her the truth. I think its better telling her than not telling. It would be very shocking and harder for her to deal with if she isn't told, when she finds out eventually. As hard as it is for kids to deal with these things, they are a part of this world and should know that death is a part of life, that one cannot deny. As sad as it is, illness/death is a part of life, and we all have to learn to deal with it. It will be hard on her, but telling her is the right thing to do, in my opinion.