My web application requires as little lag as possible. I have tried hosting it on a dedicated server, but users on the other side of world have complained about latency issues.
So I am considering using CDN or Amazon services.... would either help resolve this?
The application uses a lot of AJAX, so latency can be an issue.
A content delivery network is a great idea to speed up delivery of static content (images, javascript, etc). You could even use this in combination with a dedicated server if you want.
You may also consider using a tool such as YSlow to analyze what may be causing your latency issues.
Amazon's Cloudfront, part of the Amazon Web Services (AWS) that you can purchase, is a CDN (Content Delivery Network) -- so asking whether to use Amazon or "a CDN" strikes me as a weird question, akin to asking whether you should drink Coke or "a soda" (given that Coke is "a soda"). Rather you should ask "should I use Amazon or another CDN?" just like you'd ask "should I drink Coke or another soda?".
Your decision among CDNs must be based on many parameters - cost, reliability, convenience, speed, and so forth. Unfortunately I have no first-hand experience of CloudFront; however, on paper, it seems particularly simple to use (especially if you're already using other AWS components, since getting data e.g. from S3 to CloudFront is fast and cheap indeed;-), and reasonably priced (based on usage). But I have no experience about its uptime record or delivery speed.
A CDN will only improve the performance of your static content -- if your Ajax code requires active content, then it won't help for that.
Amazon AWS might help, but it depends on the details of your application. Amazon isn't particularly well-known for delivering a low-latency solution.
Most apps that require low latency end up addressing the issue from many directions. A combination of a CDN and dedicated servers is certainly one approach. One key there is choosing the right data center for your servers (a low-latency hub).
In case it might help, I wrote a book about this subject: Ultra-Fast ASP.NET, which includes a discussion of client-side issues, hardware infrastructure, CDNs, caching, and many other issues that can impact latency.