I'd like to have flash cards in Pleco, too.
I simply love that part of the app.
But here's an idea for the text selection that has just flashed my mind (hence it may be not quite thought through):
The iPhone lets you place a cursor anywhere in the text, even inside a word.
Why not make it like this:
1. Put the cursor (with that cute/usefull/annoying magnifying glass) directly left to the char./word/sentence that you want to search.
2. Hit a special button, created for this kind of search.
3. The search will put out a list that includes results for the searched word/char. or even a whole sentence that followed the cursor.
Another way — requiring more steps from the user, though — would be to;
1. place the cursor either left to a word/char., or inside a word/multi-character word.
2. Hit the new "highlight button" that, at the first touch, highlights the word/char., next the surrounding expression, next the whole sentence, if existent.
3. Touch the regular search-button and get the results.
(I think it should be possible to detect a sentence after the cursor, rather the complete remaining dict-entry)
Both approaches would require an adaptive interface, as with so many buttons, the interface would be cramped.