Our expert says:

CyberShrink

Its always sad when one person's choices and behaviours also hurt other people, like your daughter. Its difficult to know how children will react to this sort of situation, but it was probably worth telling her, as there was a real risk that someone else would tell her, and such a long absence would be hard to explain, anyway.
And then she would have had the truth, PLUS knowing that you were both lying to her, making it harder for her to seek comfort from you, or to believe anything else you'd say.
Right now, she's concentrating on feeling sad to find her father in such an unpleasant place. I'm guessing that she may not have been given a gentle explanation of WHY he is there ?
She's probably experiencing rather complicated feelings she can't really explain, even to herself. Remind her she can talk to you about this any time she wants to, and that while it's really sad that dad is in such a place, it happened because of serious mistakes he made, which he won't do again, and that in time he will be back with you. Maybe even start by finding ou what she thinks ( even if you tell them nothing, children usually form their own theories ) - why does she think he's there, and what does she think will happen. Respect her crying, but say that while you understand this has upset her, its also useful for her to talk about it with you rather than only crying.
I don't think you did the wrong thing - letting her find out later that she had been lied to, as well as the truth, would have been worse. Its not likely to damage her in the long term, especially as you are around to support and comfort her.
If her school-work declines a little in the short-term, that shouldn't continue. Explain to her teacher that she has had such an upsetting experience, so the teaher can be supportive. Encourage her, eventually, to see that continuing to do well at school will be a great comfort and pleasure for her dad.