Boy, that is the age isn't it? My daughter went through a similar thing when she was 7. Except she would do other things to get attention... Writing on walls, toys etc., breaking her toys, cutting her hair off (I cried), being
extremely rude to people! I was going crazy!
Then a friend of mine (who is a counselor) pointed out how much attention she was getting with all this problem behavior... She said that some kids crave attention and they will take negative attention any day over little responses to positive behavior.
She told me to start praising her loudly and animatedly every time she did anything that even remotely resembled better behavior even if it didn't seem super positive to me... Well shock of shocks, within two weeks I had a new child! She quit destroying things and started being much more polite to others!
I don't neccessarily think that growing up to be a great actor or a wonderful story teller isn't something to encourage, but she needs to understand that it's important to let the listener know it's just a story and to not tell a story that will upset others if they think it's true.
Maybe when she tells a story and is honest that she has created this story herself ~ you could pour on the praise? I don't know, it's worth a try... It can be hard to tell what will work with different kids.
GOOD LUCK! BTW my problem child is almost 30 now and can manage to be polite to others most of the time, and she is almost never destructive!!!