Provide that print-rich environment, answer her questions, and KEEP HER CONFIDENT.
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If she doesn't know all her letter sounds work on that in a fun way. If she does know her letter sounds down pat, she might be ready for playing around with initial sounds. If she doesn't get that, keep working on letter sounds. Or work on rhyming if she responds to that.  My point is, I really feel that for this age, we should stay one step BEHIND them, not ahead. Don't push them. Have fun working on things they already know pretty well. This is just my take on it.
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As far as the leap between letter sounds and sounding out whole words, it happened a little over a month ago and I cannot remember how or what sparked it. Nothing I did.  I do know that she had initial sounds down pat since a little after 2. (She is 2.5 now, so a little under 6 months ago) Â
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DD can sound out just about any CVC word. She cannot do this yet in the context of a sentence or book. Sure, she can read each word individually, but it seems too overwhelming for her to look at a bunch of words on a page. Because of her age her eyes very well might not be developed enough to do that. Knowing this I would never PUSH her to read a sentence. What we do do is give her CVC words on their own to build her confidence. She came up with an idea to make a "baby book" (her name for it.) It is a tiny notepad filled with CVC and some other sight words that she knows. It must have a hundred pages. On each page is one word. She loves this book. We also went around together and taped up CVC words around the house. For example on the oven door is "hot," "pan," and "pot." These little things just make her so proud. These things are so much fun.
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As far as providing her the opportunity to progress. I just read to her. I run my finger under the words (just started doing this.) Every now and then I mention a "silent e" in the word or how "ea" says /ee/ in that word. she responds really well to this, to the point of having memorized many of the rules. But I am not confident enough to start asking her to commit these lessons yet.  I do know that I can ask her to find any word on a given page, and she does really well with this.
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Keep your expectations low. I could expect my DD to read an early reader book sometime soon. But, that is just stress on me, and then I would be putting that stress on her. No. I remind myself that anything she is doing with letters and phonics is pretty advanced for her age right now, and I just enjoy what she is doing with very little effort or stress.
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When she asks about a bigger word I spell it out for her but then tell her it is just too big to go in her teeny tiney "baby book."Â She doesn't seem to have any problems with this.
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Starfall is great. DD loves that too. I was surprised by how much stuff is on that site. There was also a BOB app I downloaded for my iPhone that DD devoured in a couple of weeks and now thinks is boring. I have yet to find another app that seems appropriate for her. Still looking. I will gladly take reccomendations.