Kanchan, I agree with you: both sentences are equally fine. Unfortunately, however, my opinion is irrelevant to the testwriters, and these two sentences are a great example of the inanity to which the GMAC has reduced us.

The testwriters would say that the first sentence is NOT OK because we don't have a "she" in the sentence: Jane is only present as part of the phrase "Jane's first novel", which is a book, not a person. Personally I disagree (Jane is implied in the possessive), but my opinion won't help you on the GMAT!

The second sentence is presumably fine because we have a possessive ("Jane's first novel") and another possessive ("her") ... but I still think it's questionable because we don't have a woman in the sentence to whom to refer, only a novel. (What's the source stating this is GMAC-approved?)