This reminds me of my BF's niece who hopped around the room last christmas singing "bum, bum, fanny, butt" and "it's the most wonderful time....of the butt." She was 3. Personally I thought it hilarious, but I tactfully hid my delight cuz I knew they didn't approve. They wanted her to say fanny, but I hate that word. They also make her say panties instead of underwear. Blech!

I think it's probably just a phase and continue to reinforce your preferences, and call others on it if they say it in her presence so she knows it's not just her. Turn things around on her "would you like it if I called you stupid?" etc. We only say butt when we are talking about the body part (or your preferred word).