Kids just have a knack for picking up inappropriate words! I think it is a phase she'll get over. My boys have gone through that too. We had to crack down and start enforcing time out for "bad language," and that nips it in the bud pretty well in our household. Sometimes they still like to say "butt" or whatever, but I give them a stern look and they know I mean business and knock it off.

Last night I was reading a book to C (5yo) that had a blue-footed booby. When I read the name of the bird, he started laughing and said, "Booby! That's a funny word!" How do kids know those things are funny??