Without any fanfare, Amazon has added the long-requested permanent delete capability.
Go to Manage Your Kindle then click on any title. On the bottom right of the drop-down box, there is now a button to "Delete this Title." You'll see a confirmation first: "Are you sure you want to permanently delete this title? Doing so will permanently remove this title from your account, and you will have to re-purchase it if you want to read it again." Click Yes.
Then turn on your wireless and Sync and Check for New Items. The deleted item will be gone from the Kindle and the Archive. Yay!
There is one wrinkle. If you moved an item to "Trash" in Your Digital Library, you need to move it back first, so it will show in Manage Your Kindle. Select "View Your Trash" from the drop down box in Your Media Library, then select the Kindle items you want to delete and under "Perform An Action" choose "Return to Your Collection." Then reload Manage Your Kindle, and you can delete the items.
Hooray! Thanks Amazon!
ETA: Not everyone seems to have it yet.
ETA Also: At least a couple of use are experiencing a bug that the last item in a given sort or view on the Manage Your Kindle list is missing the delete button. So if that's the item you want to delete, just resort (reverse the date sort, choose title instead of author) and you should find the button on the item now.