We are now at the point where our daughter can read letters, and she can tell the first letter of word I tell her.
How we got here: A lot of montessori-like activities with letters, things like this
or just cards with big uppercase print letters and images of things beginning with a said letter.
She didn't know it's letters, it was just 'this is R as in Rabbit'. And we didn't force her, we just put the cards or puzzle into her shelf, played a few sample games as long as she enjoyed it, and let her take her time (months :)) till she found the activity naturally interesting (see montessori and sensitive periods) and picked it up and wanted us to play it.
Then there was drawing, and when she got a bit confident with crayons and whiteboard felt pen, we tried drawing letters time to time, and at some time she caught up with it and started to want more. So now she can read letters, write letters, and recently she realized (from books maybe?) that those groups of letters mean words. And recently it was huge fun to write a shopping list (letter by letter onto several A4 and A3 papers :)) and go to shop, read the list, decipher it with hur help and buy the items :).
But we still have a chasm to cross - a realization that consecutive letter sounds make a word sound. It is fun, we go out and I tell 'this is L, A, M, P' and then I say it faster and faster, but there is still a point where I stop pronouncing individual letters and say a word, and only the she recognizes it.
It won't help to rush this, I know that she develops quickly, and at a right time she'll get this - but it would be a lot of pain to try to force her prematurely.
So, we'll keep playing this and other games as long as she finds it fun, and she'll take the step when her head is ready :).