I am a teacher and my opinion would be to hold her back. It's obvious that her foundation in reading isn't solid enough to continue successfully into the next grade. Sounds like she is not a fluent reader and needs extra practice in this area. Spelling is a totally different ballgame than reading; just because she spells good doesn't mean she reads good. If you do decide to send her into the next grade, or not, one thing you can do is something called the NIM approach. This is where you sit her in your lap and you read as closly in her ear as possible and point to each word. Start out with something below or at her reading level and gradually build up and begin to let her point to the words with you. It sounds VERY simple but it works wonders!
Here is a website on the Neurological Impress Methoad ask NIM
ReadStrong - Neurological Impress Method
Let me know if you need anything else and I would be happy to help. Good luck