hi A.,
Our 5 yr old has also been prone to lies recently and can be very creative and imaginative about it.
I told her about pinnocio, and that each time she told a lie her nose grew a little more and a little more and then tried to parallel that with how each time you tell a lie, you have to tell another lie to cover it up and so little lies grow and grow into big lies just like your nose!
When she tells a 'tall tale' I just nod my head and say 'hmm' I think your nose just grew a bit more and she runs to the mirror to check and then tells the truth!
This might seem cruel, but to an imaginative child such as our daughter, it works for us.
On more serious offenses like stealing (which my son was terrible about also at that age) I would drag him directly into the store and ask for the manager and then tell my son to give the item back and apologize - luckily I almost always encountered understanding store managers but that pretty much nipped it with stealing from stores. The managers would alway say 'well I should call the police, but since you brought it back I won't for this time - but I better never catch you doing that again!' These days I suppose you should be prepared to pay for the item if they insist, but then have her do chores to earn the money for it.
It is a control issue - lying helps them feel in control. The more appropriate things you allow them to have control over, the easier this stage can be in my experience.
Sorry to be lengthy, but I also liked Nicole's approach about telling her a lie in order to see how it feels (we also did this with our son at this age). - Look at her directly and with a straight face and say (oh we just lied to you) don't allow her to think it is funny - ask her how is she feeling right now - disappointed, angry, confused? That is how it feels to others when you lie and ask how does she like it.
good luck!
W.