The suggestion in potpourri's post seemed to do the trick for me:
Open any PDF from Safari and touch "Open in iBooks". Doing this the first time creates the iBooks PDFs bookshelf. After that PDFs in mail attachments were displayed properly with the "Open in iBooks" option.
Before the PDFs bookshelf was created, mail was displaying only the first page of PDFs as an image and no options to open the file.
I agree with mochi-boy, although I already had a PDF bookshelf created in ibooks, I still would not get a "open in ibooks" until I opened my gmail in Safari 1st, and clicked on "open in ibooks". Ever since it has now worked for me using regular iphone email app.