I do not think that Kiera Knightly would quite fit the part.. Plus she is a tad to famous, and I would rather not have people come to see it for her, and not for the movie...
Casting Alan Rickman, Helena B Carter, etc. in the Harry Potter films did not hurt the movie franchise. *shrugs* But if not Kiera, I still think someone young and beautiful should play the Green Lady.
Remember this is not a Witch that looks like a Witch - either the hag witch type or the powerful White Witch type. She is young, lovely, sweet-looking. Pretty in a way that is both attractive to boys and endearing to girls. Someone who positively oozes goodness and innocence with her very voice. (I think Jill described her voice as as sweet and thrilling as a bird's.) Even when she returns to her Palace and sees the chair broken, she goes white with anger but she never shows an angry face. The only time the perfect mask breaks is when she turns into a serpent.
Besides, the last thing the franchise needs is to cast White Witch redux who will only end up being compared unfavorably to Tilda Swinton. You need a completely different type of foe here.
Slightly off-topic: Another thing that the franchise failed to capitalize from the books: in book 1, the Witch (female, powerful, magical) was the antagonist; in book 2, it was Miraz (male, military/political) and a bunch of stuffy old Telmarines; in book 3, there were a bunch of antagonists (a slaver, a sea serpent, cursed locations like Gold Water and the Island of Dreams); in book 4, the Witch again (female and magical but beautiful and beguiling not intimidating like Jadis); in book 5, Rabadash, his father and the Vizier are a literal triumvirate of evil; in book 6, Jadis again but in a different form (younger, more physical - she loses her powers in England); and in book 7, Swift and the Calormens. The beauty of the Narnia series was that there was no set pattern. It wasn't Harry Potter going against Voldemort at the end of the year (and some have argued that the strongest book in the HP series was the book where Voldemort was not the primary antagonist at all!) - it was a series where the protagonists kept changing and the antagonists were different with different motivations. The appeal wasn't just about a particular hero or a particular villian: it was the appeal of Narnia itself and the constant fight of good vs. evil in many forms. If you couldn't identify with the Pevensies, you could identify with Scrubb; or with Jill Pole; or with Aravis or with Digory.
Of course, why should Hollywood care about that when it's far more profitable to push Narnia into the Harry Potter cookie-cutter mold.
Only... it wasn't more profitable, was it?