Pictured:
Yarn A: Sugar N Cream, Summer Splash (1 ball)
Yarn B: Sugar N Cream, Hot Green (1 ball)
Needles: Size 7 circular needles (32-inch long)
Gage: 18 stitches per 4 inches in Fan & Feather. 14 stitches per 4 inches in Stockinette
Size: 5 years (but my girl is a size 7 - this is a tight fitting top)
Final measurements:
Chest measurements: 24 inches
Body of halter: 13 inches
Abbreviations:
CO = Cast on
K = Knit
P = Purl
K2tog = Knit 2 stitches together
SSK = Knit 2 stitches together from the back
YO = Yarn Over
Pattern:
We'll start from the bottom and knit up. The skirt part of the halter is a fan & feather pattern knit flat.
Yarn A: CO 108 stitches
Row 1: K all stitches
Row 2: P all stitches
Row 3: *K2tog 3 times, [YO, K1] 6 times, K2tog 3 times* 6 times
Row 4: K all stitches (This row puts in a ridge on the Right Side)
Repeat Row 1 through 4 one more time.
See the photo below. It only shows two ridges on the bottom. This makes it look like it has ruffles.
The rest of the fan & feather pattern is knit without the ridge - continue Fan & Feather using the following rows:
Row 1: K all stitches
Row 2: P all stitches
Row 3: *K2tog 3 times, [YO, K1] 6 times, K2tog 3 times* 6 times
Row 4: P all stitches (by purling this, you will not be making a ridge on the Right Side)
Knit these 4 rows until piece measures 8 inches long. The last row 4 should be a ridge row (or you knit it). See the next photo as an example.

Next, we need to decrease 24 times across the fabric to make the total number of stitches cast on to be 84 stitches.
Decrease Row 1: (K4, K2tog) 18 times (90 stitches on needles)
Decrease Row 2: (P15, P2tog) 6 times (84 stitches on needles)
Switch to Yarn B, K all stitches and join in the round. Place marker. Knit in the round till the stockinette part of the halter measures 3 inches.
Next, you need to work on the front halter part of the top.
K63 stitches, Bind off 42 stitches.
Now you'll knit flat again.
Row 1: K1, SSK, Knit to last 3 stitches, K2tog, K1
Row 2: Purl all stitches
Repeat these two rows until halter measures from the bottom CO edge, 13-inches.
Next we need to make the Picot edging
Picot Row 1: K1, SSK, (YO, K2tog) to last three stitches, K2tog, K1
Picot Row 2: P all stitches
Picot Row 3: K all stitches
Picot Row 4: BO in Purl stitch.
Next, sew the BO edge to the back of the fabric to make the Picot edge. See photo below

Next we need to make the straps. Looking at the back of the halter, count 10 stitches from the side & pick up and knit 5 stitches. Knit these stitches in a garter stitch (k5 each row) till the strap measures 15 inches.
Make a button hole: K2, YO, K2tog, K1.
Knit two more rows and make another button hole.
Knit two more rows, then bind off.
Do the same thing on the other side (count 10 stitches from the other side, pick up and knit 5 stitches, etc.) The photo below shows the beginning of the strap.
Sew two buttons on the inside of the picot edge (see the picot edge photo).
Weave in ends and you're done!


ETA: I made the top 24" in circumference. M's been that circumference for quite some time From the YarnStandards.com site, this size would put her squarely in the size 5 category - but she's very long and has been wearing size 8 for the past year. The top needs to be snug to fit. If the top is a little big, it does look cute with a tank underneath (see Gea's top - her daughter is wearing a tank under it and it's still cute) and can easily grow with your girl.
Thanks for all the great feedback!