my mom is teaching my 5 year old (well she's almost 5). I second the recommendation for the lion brand size 10;s that have two different color needles (and a cute kitty hat on the end). They are just the right size for her hands and she can manage the stitches without the yarn falling off.
Mom gave us an old bit of cotton yarn (leftover from a project) and I can see it gives her a good surface to hold on to. (traction!) She is just making a square of about 20 CO stitches. It will be big enough for a large coaster for Daddy. (even with all the mistakes, twists, etc.)
She really likes to knit- but I find she wants me to start and end a row. She will do the middle.
Good luck!! It is a great bonding experience. A great skill to share with the younger generation and they will always remember when you taught her to knit. Marykz