One of the great power tools for kids to work with are the rotary tools, like Wizard or Dremel. You can get vices that will hold the motor fixed, allowing you to either bring the project to the tool, or attach a flexible shaft. The flexible shaft is even easier for a kid to handle than the tool because they don't have to hold the weight of the motor. You can get bases that turn them into drill presses or even routers.
The key to all the rotary tools is the wide variety of totally inter-changeable attachments that can be put on the end, from drilling, to sanding, to grinding and polishing. If you haven't looked at the accessories for these tools recently, you may want to look again, as they keep adding new ones. I just loved this little circular saw that you see in the photo above. You won't be cutting 2x4's with this, but you could be making a model house as it just whips through any 1/4 inch material including dense Masonite.