Well, all 9 Dictionary hits on OneLook cite the "cheap, melodramatic paperback novel" definition, many say it's chiefly Brit., the British version of the USn "dime novel." None even list the Valentine associaition as an obsolete usage or origin. Yet, all those Valentine historians point to this Valentine slang. Does the OED have any further entymology on this, please, OEDers?

Here's the OneLook page, the Quick definiton is on the right:

http://onelook.com/?w=penny+dreadful&last=pennydreadful&loc=spell1