I have had a recent issue with this as well. I did confront my daughter about it (in a non threatening way). Make her understand that she is not in trouble. I basically explained it as inappropriate behavior and how it would effect some one much younger than she is and then went on to explain what was appropriate play and what wasn't. Come to find out they had a sex education class and she was curious and had a lot of questions.

It sounds like your daughter is curious about her development.  If you have not already done so, maybe consider a book or two that you can read with her about puberty and growing into a young woman.  American Girl makes a great starter book called "All About Me".  If you are already past that stage, then maybe another book that talks more about sexual development.  While reading, take opportunities to talk to her about what's important emotionally for girls to make good decisions & listen to her about any questions she may have.  You could also bring up the incidents with her younger sister and let her know why that is not appropriate.  I have found that reading before bedtime is a good time to discuss serious topics and other matters of the heart.

There are times that kids really do experiment a lot especially when they can't just ask it directly to their parents or anyone who is old enough. Especially this days, with or without internet or TV access they can still get those information or curiosity because of the other kids around them. They tend to follow others' league to see what might happen if they're going to do this or that. I think the reason why your daughter is doing that because she lacks the knowledge about those things. She's trying to explore on her own, thinking that what she's doing is fine. I think you've got to have a one-on-one talk with your daughter. You can ask her out and talk it over lunch or go over it during your bonding time with her. You've got to tackle the topic lightly. You can start by asking what she and her friends do during their bonding or what they usually talk about when their together. You can also ask her about boys (what she thinks about them or if she's interested with them) and then eventually the topic that you are concerned with will come after. I guess you should try to ask her where she learned it and why she does it. You need to make her feel assured that she can talk about anything with you. Make her feel that there's nothing to be afraid or ashamed of when opening up things with you. But i guess you've got to remember also that if you feel that she's uncomfortable or she's trying to change the topic or not answer your questions, you try to change the course of conversation.