Google can read the contents of the emails stored in GMail. That's explicit: they officially scan the email contents, see this FAQ, specifically the question "Is Google reading my mail?":
No, but automatic scanning and filtering technology is at the heart of Gmail. Gmail scans and processes all messages using fully automated systems in order to do useful and innovative stuff like filter spam, detect viruses and malware, show relevant ads, and develop and deliver new features across your Google experience. Priority Inbox, spell checking, forwarding, auto-responding, automatic saving and sorting, and converting URLs to clickable links are just a few of the many features that use this kind of automatic processing.
(This answer can be summed up as: "no, we do not read your emails, except that we totally do read them, but, trust us, that's for your own good".)
So if Google can read the emails, any attacker gaining control of the Google servers obtains, by definition, the same kind of power, i.e. he can read the emails, too.
Now there may be details about storage: possibly, the database contents might be encrypted with a key known by some other Google servers, so that an attacker gaining access to the database only, but not the other servers, would still be locked out of the email contents. This is not very probable, though: there is some non-negligible overhead (a little extra encryption cost, and, more importantly, the inability to perform the most expensive scan&match methods directly on the database machines themselves). So such database "encryption" is normally done only when you do not trust the database provider (but Google is big enough to be its own database provider) or when the data is very sensitive (e.g. passwords). My guess is that emails are stored as cleartext on whatever machines do the storage at Google's.
(Usual wisdom is that email contents are much more at risk during transit than when stored by a competent, security-aware provider. For much better email protection, use GnuPG with your correspondents; this will protect emails both in transit and when stored. GnuPG interaction with GMail's Web interface appears to be tricky, but GMail is also an IMAP provider that you can use with a classical mail client software.)