Sony has not yet added integrated dictionary lookup support to its readers (and with the search function of the 700 it seems a glaring oversight, to say the least) but while we are waiting for them to get a clue we can still make our own dictionaries.
As an example, i give you nrapallo's Webster's 1913 dictionary in epub format
. It has a fully hyperlinked multi-level toc / index to help you get close to the word you're looking for, and from there you can use the search feature. it works really well. and it's free.
i'm sure we would all be really happy to see epub versions of other dictionaries if some ambitious soul takes on the project. i'm currently working on a french dictionary but it's going to take me a while...
since this seems to be a popular query around here, on wetdogeared's suggestion i'm making this a sticky.
500 / 505 owners looking for dictionaries, also take a look at this thread