Something like this would be excellent! Really, if Dreamwidth's reading list became as user-friendly as just about any RSS reader I'd squee in delight. >.>; Anything that moves DW closer to that is awesome in my book.

I'd say that along with this, there should be some visual reminder on the page itself, like how Google Reader's "unread" count updates and bolds. Also some way to distinguish between read and unread items. Those might need separate suggestions though.