The highlight length is hard coded, but easy to fix in a modified Reader app. I will include "unlimited highlight length" in the next version of my modified Reader.
For those who don't want to wait or don't want to use my modified reader (and know their ways around apktool and smali): Commenting out the 8 lines of code after both ".line 2071" and ".line 3033" in BookReadingActivity.smali (v1.0.04.12210) does the trick.
Annotation created with stock Reader:
http://dl.dropbox.com/u/2086827/annotafter.png
Annotation created with Reader with no annotation length limit:
http://dl.dropbox.com/u/2086827/annotbefore.png
Cheers!