Frederic Lardinois, over at ReadWriteWed, has an article comparing these two apps.
In terms of functionality, the choice between the two apps depends on your needs. If you need to highlight and if you want to take notes, then the Kindle app is the only way to go. If you just want to read, the iBooks apps is just fine. Prices in both the iBooks and Kindle store are likely to be very similar – especially now that Amazon is slowly giving up on its idea of selling all e-books at $9.99.
The real advantage of the Kindle app is that you can read and sync books with more devices. You can start reading a book on the iPad at home or on the plane, for example, and then continue reading on your iPhone while you are waiting in line at the post office. Chances are that Apple will launch an iBooks app for the iPhone sooner or later, but until then, investing in Kindle books seems like a smarter decision as you don’t lock yourself completely into Apple’s smaller ecosystem.
A lot more detail on the site.
As much as i want to use the slick iBooks app there is no way I’m going to let myself be locked into a single device. In fact one of the final reasons that made me get an iPad was the Kindle app and the trust in amazon to ensure availability of my purchases on all relevant reading platforms.
By the way the iBooks app does have highlighting and a built in dictionary as well as wikipedia/google integration.