Those of you who have been around for a while know how much I sew for my shop and how my nieces like to pretend to sew. For goodness sakes little L watched me sew and slept for hours while slung from a carrier when she was a baby and then as a toddler she loves sitting on my lap pretending to sew (see the Slave Labor post for proof).
I found Singer's Zigzag Chainstitch Sewing Machine at Joann Fabric and picked it up for the girls for Christmas (I paid 13$ after using a coupon on it). It was a huge hit. L is way more into sewing in general than T but they both like it a lot.
In short I adore it as a toy but would not recommend it as a 'first sewing machine'. I wrote a full review for it over at the Modern Handmade Child Magazine blog go read it here.