**Disclaimer: I do not generally dress modestly. In fact, even with my long, very tznius skirts and occasionally covered hair, I tend to wear shirts that would make tznius women avert their eyes.
That said-- I've got two little girls who vastly prefer to wear dresses or jumpers to pants (the older in particular) and I have issue with the sexualization of children. The girls want to be comfortable, and I want them to look cute, so that's what they get-- cute. BooBah prefers soft cotton dresses, and is very unhappy if they don't come to mid-calf length or longer (no idea why). Bella likes jumpers, and tends to dress in layers-- while for BooBah, any dress or jumper is fine without an undershirt or turtleneck as far as she's concerned, Bella will have you dress her head to toe in something else and pull a jumper over it.
She likes to wear layers and layers. She's 20 months old and far and away the least verbal of my children, yet she has never flashed anyone (and even if I did, she's inevitably wearing pants under her jumpers).
Sleep & play suits have legs, and every frum family I've ever known has put those on babies, boys and girls alike. It's not reasonable (or at all modest, really) to put a crawling child in a skirt, either. Once they start walking, things are often different but crawling babies wear pants/shorts, in my experience.
We really can't afford Hanna or Land's End or anything like that, but we've had great luck finding appropriate clothing in Lancaster county because of the huge Anabaptist population.
Check out Weaver's Store, and ask some of the mennonite women there how they deal with modesty for little girls-- I've seen all sorts of solutions. I also have to agree with the posters who said that girls who wear dresses occasionally are very different from girls who wear them all the time-- the flashing problem has to do more with the novelty than the fact that they're wearing dresses.