Seems like a good idea
I have no idea how to sort out the cost -- $2.50 an hour of EBS equivalent? -- but the concept sounds, umm, sound.
I run some NFS at home, and even with the low latency of a gigabit switch (and a 100mbit one at the other end of my place)... large file reads and writes run at wire speed (assuming the disk keeps up); latency is relatively irrelevant. Other types of accesses (small, random accesses, or going through numerous small files), 1ms of latency already makes it significantly slower than local disk, let alone 25, 50, 100, 250ms delays of S3. (I've read S3 to EC2 latency is *typically* like 100-250ms... which honestly is pretty high!)
Caching? It could be inappropriate if your central (in-S3) data is frequently updated from multiple sites, making sure the cache doesn't return stale data could add most of that latency right back. But otherwise, absolutely, cache the frequently used subset of your S3 data, and your latency problems largely go away.