This is a no-brainer, right? It's your child's story, and they are entitled to have it told straight. Omissions are OK if developmentally necessary (but see IV), but no lies. Kids have a way of finding out the truth, and then we've broken trust. Betsie said that adopted kids tend to snoop more than non-adopted kids (curiosity about their background), so it's not at all unusual for them to ferret out the truth before they are told.
V. Remember the child knows more than you think.
See snooping, above! Not to mention, if anyone in the family knows it, chances are your child has overheard parts of the story and are filling in the blanks on her own. Or someone else -- older siblings, school friends who heard something from their parents -- is telling your child. And they are likely not doing it in a kind and understanding way. Even if they are, the game of "rumour" should remind you how skewed the story will be by the time your child hears it.
Also, your child is probably developmentally ready to hear parts of the story before you think they are. Although parents are experts in their child, their reluctance to share hard truths and desire to protect the child might lead to underestimating their ability to understand.
Even horrific information needs to be conveyed in a neutral manner. Conveying negative judgments of birth family or their actions will be seen as a rejection by adopted children -- if you don't like my birth parents, you don't like me.
And what we see as terribly negative information may not be that for the child. Betsie's example was when she was called in by a family to share the fact that their son was conceived as a result of rape. Everyone was surprised that the boy was actually happy to hear it -- he had internalized ideas of his birth mother as promiscuous, and was glad to know it wasn't so.