This occurs in Chapter VII, "The Governor's Hall." Pearl, Hester's daughter, sees the letter A greatly exaggerated and Hester notices Pearl's face reflected within the letter. She looks like a little "imp." The signficance is that Hester feels absolutely defined by this misshapen representation of herself, and indeed she is viewed as such. Seeing Pearl in this way is significant too, because she sees what she knows is there in her troubled child: a mischevious elf-like creature that is not always benevolent and at times seems to want to consume and destroy her.
Here is the scene:
"Mother," cried she, "I see you here. Look! Look!"
Hester looked, by way of humoring the child; and she saw that, owing to the peculiar effect of this convex mirror, the scarlet letter was represented in exaggerated and gigantic proportions, so as to be greatly the most prominent feature of her appearance. In truth, she semed absolutely hidden behind it. Pearl pointed upward, also, at a similar picture in the headpiece; smiling at her mother, with the elfish intelligence that was so familiar an expression on her small physiognomy. That look of naughty merrirment was likewise reflected in the mirror, with so much breadth and intensity of effect, that it made Hester Prynne feel as if it could not be the image of her own child, but of an imp who was seeking to mold itself into Pearl's shape."