This little space wants to be a little girl's reading nook.

I'd start off by painting this entire bedroom, including this dormer, in the same pear green as your other wall - then find a sweet swirly/floral fabric that has that color green with some red and have it made into a custom seat cushion with red or white welts, some matching draperies for the window trimmed with matching red or white ribbon, lined w/ a red & white striped fabric and a matching scalloped valence with the same ribbon trim for above the top of the window.

Fill the seat with 3 coordinating striped & print throw pillows in various sizes that repeat the same red, white and green, a little round rag rug that has the same green & red colors for the floor - Also consider installing a wall-mounted brass reading lamp on one side with a sweet red & white ribbon shade and add a tiny wicker table to catch books, tea, plates of cookies, etc...
...and find some vintage china plates from the flea markets in various patterns and hang them on either side wall for interest. Find a nice old chair that you can paint white or red and bring into the space and cushion w/ the red & white striped fabric where her friends can visit with her across her little table (or a teddy bear or doll can sit when she's alone)

Excellent, Excellent idea!!! I can't wait to go out and find fabric - thanks so much!

I can't wait to see the "after" photo! Please come back and post!

Glad you like the idea - Good luck!

Reading Nook? Or castle? I think a castle tower facade on the front with enough opening for light from the window to still flow through. Problem with a reading nook is, despite the window, it doesn't look like it gets much light. Plus, there's not enough space for books so they'd have to be stored elsewhere. As it stands it looks a bit like a timeout corner, er...dormer. haha! Throw up a painted plywood facade that looks like the tower of a castle and once inside imagination will roam! :)

a cosy little reading nook for sure, cushion as seat cover, for child imagination, paint the upper portions cloud like blue and white whimsy... the middle and lower portions paint in trees , flowers and greenery.. it can be your daughters secret garden nook for reading ...

Another possibility is to hang some wonderful curtains floor-to-ceiling across the outermost walls; from the room, it will look like a window curtain, then abracadabra, secret niche for a princess! Hanging a light from the ceiling will solve the light problem. A canopy over the window, supported by gold/colored satin ropes to the ceiling or by a spring rod between the 2 walls, will make the cushioned bench look like a throne.

I had a similar situation in my daughter's room. I used the space to create a dressing room and stage play area. I didn't have the seat so there was space to install a bar for hanging the costumes in that area. I also included containers for props. I hung a velvet "stage" curtain that was split down the center at the opening and installed easy to use tie backs to hold the curtain panals back as they played. Finally I built a 24x36x5" platform painting it in a fun pattern and bright colors and put it just outside the opening. She has a great time with her friends putting on plays there. fd

What an awesome little nook!
This is what I would want to do with the space (Note - I prefer modern decor and design):
First, if budget was not an issue, I would cut out the entire section of wall that the window is on and replace it with a picture window that fills the space. If that were not an option, then I'd switch out the current window for a single pane one. Then I would also make a seat cushion and coordinating throw pillow and hang book display racks on both of the walls either side of the seating area similar to the ones in the below images. (The 3 seperate shelves are actually the IKEA BEKVAM spice racks repurposed for book storage). Or you could build niches in both walls and install some shelving for books. That way you would still maintain all of the usable space. If you decide to go this route, I built 3 wall-mounted book racks out of scrap wood and dowels for my daughters room and have also built 3 wall nich shelving units in my house and can offer tips/advice if you need help.
Again, just my personal preference. Hope it helps.
Can't wait to see what you do with it!

Everyone here has been so helpful - I wish one of you lived close : ) All these ideas are exceptional. I have a lot of thinking to do!!

above ideas are all awesome!!! Depending on your style and your kids taste of course, I would suggest putting the curtains outside the dormer so that the space becomes like a hideaway/stage/playhouse for her! If you could lift the wooden seat up, its great for storage, I would put bead halfway thru the walls in the space including under the seat and then put a cafe curtain on the actual window. Plus, putting the curtains on the outside will emphasize how special the space is for her ( and you can easily hide any "mess" if ever there are, behind it!). I would put a small chandelier on the ceiling or you can have 2 sconces on either side of the wall with cute gingham shades so that it can be a reading nook for her. Lots of pillows is the key if you want this turned into a reading nook, and the bookshelves suggested by aprilaries would be great there. Another thing, since its a small space, why not put a small flokati rug or something more fluffier to make the space cozier! ENjoy decorating!

I meant bead board... not bead, sorry.

what are the dimensions?

You already have some great idea's going, just thought I would throw this in too!

Love this space. I wish I had one just like this for my little girl who loves being tucked into cosy spaces. As a start I would build some full-width steps up to the window seat leaving the front of the steps open to store books, dolls, etc. or top-opening steps to store dress-ups in. This leaves the rest of the space (walls, window sill, seat, etc) for decorating. I would also upholster the wall around the seat so she can lean comfortably against the wall whilst reading and eliminate the need for cushions which would take up the seating space. I'd also make sure her view out of the window was magical (a hand-painted garden screen on external plywood with fairies, ladybirds or whatever her favourite theme is, a metre or so from the window and soften the edges with a non-rampant climber). A large mirror on one of the walls to catch some of the external light and give the nook a more airy feel (give it a decorative border). Then you can have as much fun as you like with the decorating touches. I'm sure once you start giving your little girl some ideas, her imagination with go wild and she'll give you lots of ideas for decorating.

This area would be great as a dressing room/make-up table. The nook could be make-up table and on the walls you can place hooks or towel rods to hang the princess dresses and hang a full length mirror too. I suggest you paint this area a cranberry or raspberry and add some glitter.

Such a cute space for a little girl. I posted a couple design ideas for the window treatments . One style is a fun hanger style valance for a pretty look with a cordless shade featuring a top down bottom up operation for light control. The second is a soft, operational london shade with covered buttons and contrast pleats. I would finish the nook with a seat cushion and coordinating pillows.

This space cries out for a small chandalier and some curtains to close off the space for secret meetings!

Dimensions are 40" wide and 74" deep. Thanks everybody!!!

cpdpdecor - that is adorable!! I really love the one on the right.

I could see this as a cute little reading/lounge area. I would extend the platform out to the edge of the wall to make room for stretching out. Make the lower area a total storage box with lid, drop front access, or drawer. On top, create a lounging area: fabric covered thick foam pad; pillows; blanket, stuffed animals. A bookshelf or two up above on one side; on the other side a sconce reading light. It would be a great space.
http://www.houzz.com/kids-bedroom-nook