Chronic Liar

Let her know that when she was little all she had to be was cute. Now that she's getting to be a big girl it's time for her to decide what kind of big girl she wants to be. Ask her what she wants people to think when they think of her. Does she want them to think she's kind? Smart? A good friend? A liar? Someone who is dishonest and can't be trusted? Tell her that the choice is hers to make. Let her know that if she continues to lie all the time then people will not want to be friends with her because everyone likes honest people. See if that helps.

I believe this is a deep seated issue at this point and could be attributed to a few things....all of which need to be addressed and looked at closely. All children lie. The problem here is the amount of lying going on and why it has become so prevalent. Most pathological liars don't feel good about themselves and they will lie and embellish things to make themselves feel better about who they are. Their stories or lies are of importance and it gives them an upper hand. The stories often provoke extra attention or sympathy
for the child. Self-esteem, or lack of it, is a huge part of this. Other reasons why kids chronically lie is out of fear and also modeling behavior of the adults around them.
Fear can exist if the child constantly over-predicts the outcome of things before they happen and feels that the end result might be a huge blow-out or a big scene. "If I tell the truth, I'm gonna be in serious trouble and that makes me afraid so I'm going to lie because there's a chance I won't get caught". This is seriously how kids think if they are fearful of discipline, criticism, or punishment that might come their way. Also....and I'm not saying that this is your case....children lie when the adults around them do the same. People might think adult liars won't raise dishonest children but the apple doesn't fall far from the tree. If lying or embellishing is part of the mainstream dialogue of a family, that is what the child picks up on and he or she will repeat that behavior at a very young age. Once again, I am just stating the possible causes of chronic lying in kids but I am not accusing you or your family of this behavior at all. Just asking this question makes me believe this is not the case in your family and the behavior bothers you deeply because you are honest and expect the same out of your kids too.
I think it's time to get some help and reinforcement from outside professionals. Things like this can take a turn for the worse very quickly and lying swiftly turns to bigger and harsher untruths. Dishonesty can wreak havoc on family dynamics and will breed resentment and distrust for years to come if she doesn't get some help to stop the pattern. You still have time here but don't take a "wait and see" approach with this. Kids that can't get this problem under control before they hit middle school or the teenage years will be hell on wheels with green flag racing to becoming manipulative and often decietful adults. I'm telling you all this because I watched a beloved childhood friend struggle and deal with this when I was young and unfortunately, she is still at it as an adult too. It is difficult to remain friends with her as everything she says or tells me is usually a bonafide lie or some trumped up fashion of the truth. The trust in her when I really need it is zero. I hope things work out for you and your daughter. You can still turn this around.

Take her to a child psychologist. Make sure that whoever you use has dealt with this particular issue.

I don't think a psychologist is necessary just yet - she's only 7. I think you just need consequences. I would try to find out what she is trying to avoid by telling the truth. If she thinks she's going to get in trouble about something...confront that. Every time she lies, take something away. Whenever my dd lied about something, I would make her write an apology note stating what the lie was and what the truth was and the reason she lied.

Eventually, the truth will be easier.

I agree with the posters who suggest counseling. You might consider finding someone to help her who also offers family counseling, just in case there is a family dynamics issue going on. I think MegantheMom already elaborated on points which I would have made, so you can re-read her post if you want my opinions.

Good that you want to help her break this habit while she's young.

I lied a lot when I was a kid. My parents never made a huge deal about it, just explained the consequences. I started lying to my friends instead. I started getting put on the spot and causing arguments and learned my lesson. Both my parents always set an excellent example as well. I see a lot of parents tell white lies-just cant be done unless you want your kids to do it.
We have a minimum 20 minute reading rule per day in our house. I found that the 'help me be good' series of books works well with our 7 year old. It opens up a dialog and she seems to light up because the stories give simple examples of lying that she understand (Lying by Joy Berry).
Some children need more than just explanation, so when we see people lying-we talk about it when we get home. We also talk about how the person could have chosen to handle things differently.

Don't over react to the lies. Just say, "Oh, Amy, thats not true". Move on,

She is too young to understand the hurt caused by a lie. I believe the best way to to teach her how much it hurts to be lied to is to tell her a whopper. Something like "Honey, daddy and I decided you are old enough to have a puppy." Then go into it what would you name the puppy, what kind of puppy etc. Let her get really excited then maybe on a Friday night tell her 'Oh I lied, hyou are not getting a puppy" and watch her face fall and the tears flow. After a few minutes explain 'lies hurt, don't they'? "So please stop lying to me and daddy and your friends."

I know this sounds extreme but it works.

What have you done when she lies? Without knowing that, it's hard to suggest ideas.