I asked myself the same question when i bought my girlfriend a digital camera for christmas.
I started by asking myself "what is she going to use it for?", and I decided she was just going to want "point n shoot" 7x5 pictures for partys and basic holiday pics. I bought myself one of those magazines on digital photography (I suggest you do the same, they have a roundup of the best buys per price range usually) and it was stated that if you wanted just basic camera features (flash, macro mode, 1600*1200 res pics, AV/USB connection etc) then a 2 megapixel camera was ideal for basic snaps at 7x5.
After using it for a bit, I would have preferred a digital camera that had an optical zoom. The only problem with the optical zoom cameras was that they started coming into the price range of £130+. See buying advice and explanations here http://focuscamera.com/sc/infopage.asp?infoname=digital.
I can't really recommend a camera from personal experience, but the digital photography mag I bought recommended the Kodak Easyshare CX6230 in the sub £200 category, which comes in at £149.
www.dcresource.com as well if I remember correctly. I spent hours at those sites before deciding, the forums on dpreview.com in particular are full of friendly helpful people.
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