This new tool helps authors and publishers combine artwork and text into an illustrated kids’ book which can be read in a Kindle app on smartphones, tablets, and computers. I haven't had a chance to use it myself, but Amazon says that it will create a great reading experience for kids and parents alike.
From the description in the user manual, I can see that the app lets authors import manuscripts in html, PDF, Epub, Mobi, Word (doc/docx), and other formats, and that the supported image formats include ppm, png, jpg, and tiff.
"Authors want to focus on telling great stories and we want to help them do that. No one should have to be a computer programmer to create a beautiful, illustrated Kindle book for kids," said Russ Grandinetti, Senior Vice President, Kindle.
In addition to launching the new app, Amazon also opened a new section of their self-pub platform. KDP Kids complements the new app by offering authors age and grade recommendations so parents can better choose the books suitable for their kids.
All in all this looks like it will be a pretty useful tool - assuming that all you want to do is make Kindle ebooks.
You can download the app from Amazon; it's available for Windows 7,8 and for OSX.