Her grandfather, Brian O'Dwyer, 66, also drowned after he dived into the sea to try and save her.
The two bodies, along with her grandmother Jill - who has been discharged from hospital after being treated for shock - were pulled from the sea by fishermen near the fishing village of Nazare.
The Express reports that Lara had been walking along a quiet part of Salgado beach with her grandparents and three-year-old cousin, while her parents sunbathed nearby.
The incident happened at around 2pm on Tuesday and medics tried for almost an hour to revive the little girl.
Nazare Port Authority commander Antonia Albuquerque e Silva said: "The grandfather was dead when he was hauled from the water. Emergency services tried to resuscitate the child.
"The girl was playing with shells in the sand, near the sea but not in it, when she was surprised by a very big wave, which dragged her out to sea. Her grandparents tried to rescue her but were unable to. It is a dangerous beach, a German woman drowned last year."
A spokesman for the Maritime Authority said it was widely known that the beach is hazardous and explained that the family were walking around 400 yards away from the area they monitor.
Lifeguard Nuno Carreira said: "The waves were very, very powerful - and up to 10ft high. We put up the red flag to tell people to stay out of the sea."
A second Lifeguard, David Branco, said: "We spent more than an hour trying to revive the girl because we just didn't want to give up.
"She was given CPR and adrenalin injections but there was nothing we could do.
"Her parents arrived at the scene about ten minutes after we did. I think they had been sunbathing further along the beach. They were crying, inconsolable. It was very difficult, very upsetting."
According to The Telegraph, Lara lived with her parents Philip and Sian in Clapton, East London, where she was a pupil at Rushmore Primary School. Her parents were said to be preparing to head back home to London.
Lara's headmaster, Ian Mullaney, said: "Lara was a bright, friendly and positive girl who was well liked by her teachers and classmates. It is a tragedy and the news is just sinking in for all of us."