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The long answer is only if you're willing to use certain python scripts to make the library books readable on your Kindle.
For Mobipocket format books, one set of scripts will a) generate a valid PID for the standard Mobipocket DRM scheme and b) make a minor change to the downloaded file to trick the Kindle into opening it.
This doesn't actually crack the DRM, and the book will still expire on time, so this is generally considered reasonably legal.
For ePub and PDF files, you do have to crack the DRM, and convert the ePub ones at least. Under current US law as I understand it, this is probably considered illegal, fair use arguments aside. Under other countries' laws, it depends.
It's up to you how comfortable you are doing this.
I myself have no problems with it, but then I don't live in the US and don't have to deal with the DMCA (despite our Minister of Heritage's attempts to steamroller similar legislation into place), and my local library is well-stocked enough with Mobipocket ebooks that I've yet to try any of their ePub/PDF selections.
As for the likelihood of Amazon updating their stuff to allow library use, I seriously doubt it.
They own Mobipocket outright now, and haven't even bothered to make the Kindle (which uses a modified Mobipocket format) accept users' possible earlier Mobipocket purchases, despite it probably being fairly trivial for them to implement some form of compatibility.
If they're not willing to allow a very slightly different version of their very own bought-and-paid-for format to work on their readers, I don't see them shelling out the bucks to license a competitor's.
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