I do understand why the kids are picking on her -- because they CAN. It's kind of like lions jumping on a meek lamb, they are almost compelled by blood lust to do it. It's sad, and wrong, but it's how many kids operate. And pack mentality drags the other kids along.
Usually I suggest role-playing, to teach a shy, retiring kid how to stand up for herself, but in your daughter's case, it sounds like she is so shy, she might not be able to do it.
I agree with the others that you should get her involved in something outside of school that she can excel in, and build relationships through.
I also think you should talk to her and find out just how painful this whole school experience is for her. Homeschooling and homeschooling groups might be an option as another posted suggested, if your daughter wishes, until she can find a way to comfortably coexist with other students.
Another suggestion was to have her talk to the school counselor, and that should definitely be a start.
An activity that makes her feel strong, like martial arts, would be good if she is in up for it.