UPDATE 9/10/13: This app is no longer free, but still fantastic!
A fantastic free app for learning letters (and new words!) is Endless Alphabet. This app lets students manipulate letters on the screen, tapping on each letter to hear its name. Students spell out words too, adding to their vocabulary as they learn the names of letters. Great for the primary classroom or English Language Learners.
Check out my Common Core aligned iPad lesson plan bundle for teaching ELA in the classroom! (Here’s bundle #2 and bundle #3!)