I'm taking a course on nutrition throughout the life cycle and just recently spent some time learning about and discussing the exact problems you are describing. Hopefully I can help.
To answer your fist question, her condition is not as bad as you think. This is extremely normal and relates to her slowed rate of growth. At age five, she's not growing as fast as she was when she was younger, so her appetite has diminished considerably.
On the other hand, although children are very good at regulating their food intake to meet their physiological needs, 5-year olds are approaching the age when external factors begin to influence food intake, as well. This is usually more relevant to types of food eaten, rather than the total amount, however. A general work of advice that you may hear is that it's the parents' job to decide what children eat, while it's the child's job to decide how much to eat.
You can be reassured by the fact that her growth does not appear to be suffering. As long as she does not plateau in growth, she is getting what she needs. Tracking growth is the best way to assess whether or not a child is malnurished. Comparisons are best made to past measurements for a single child rather than the measurements of other children. Growth is sporadic in young children; some children experience faster growth and greater appetites at different ages than others.
Parents tend to overestimate how much food small children need. Their stomachs are much smaller, so they physically cannot eat large amounts at one time. (A good rule of thumb is to make portion sizes equal to their age in tablespoons.) Snacks are therefore a must.
Other than the above, I would also advise not to make eating a stressful situation for her. This may exacerbate the current problem or make her associate eating with anxiety as she grows older. If she doesn't feel like eating a meal, just cover her plate, put it in the fridge, and give it to her when she's hungry. If she refuses to eat a certain food or only wants to eat one food all the time, just wait it out for a little while. She'll likely change her preferences a lot, usually on a weekly basis, as kids usually do.
Again, just make sure she continues to make progress in growth and try to make the foods she does eat nutrient-rich.