Oh my gosh, I hate that! I believe that the terrible two's are because they are at a point in their little lives where they are testing their boundaries, curious about things, but not very good communicators and are at the basics of learning social skills. They get so frustrated and take it out on everyone. But also there is a part of their relationship with people that they are testing to see how people react.
First, I totally disagree with Shannon. If the "time out" is done properly, then it works. It's when parents slam their kids down or threaten bodly harm instilling more fear into them that it doesn't work. I think 1 minute for 1 year of age is a good method as it's worked with me with kids in my family and watching others. I believe corporal punishment is a parents choice but I've never seen any value in it. It's about choices. I agree with Brianna. I've learned in my parenting, and I've had to revamp it because we learn from how we were parented, but that we should never bring our own baggage to the table when parenting our kids. It hurts them in the end. I've also learned, "If it doesn't work, stop doing it!" Sounds pretty common sense, but we've all been there. We have to check ourselves. "Is this working?" From my experience, the number one most important aspect of how you deal with this bad behavior is how you approach your daughter. Consequences and empathy. Not anger or impatience. Depending on your tolerance (and wit's end) this can be nearly impossible. She probably loves her sister very much but gets frustrated with her, or it could even be she feels more comfortable taking out her frustration on her because she's not Mom. Consequences work best when they are related. But first address the mood. I challenge you to doing a time out but like this. "Oh wow, it looks like you need some time to calm down. You don't want to sit over here? Biting your sister tells me you want time to sit and calm down. I know you can do it. =D You are big and strong and smart! (1 min. per year of age). I will start counting when you show me your ready by sitting still and being quiet." Don't stand around to be the audience. But be near and check on her with big curious eyes like "Are you ready?" "If she isn't ready, say "I see you are not ready for me to start counting. Just let me know when you are ready by sitting still and being quiet." Especially the first time, it may take a few minutes before she caves. She may (and probably will) get up and try to walk away. Help her back to the spot and let be supportive and empathetic to her plight from making a bad choice. "I know you can do it!" When she actually is doing it, check in on her with obvious curiousity and say "You are doing a good job! I knew you could do it! Not much longer to go." If she breaks the sitting still and quiet rule after the time starts. Go "Oh my gosh! You were so close! It's a shame you have to start all over. But I know you can do it. You were almost there!" Eventually, you will get through it, and you will have a child with a big smile because she did it! (Been there myself. It's amazing how well this works.) And it was her consequence, not you being mean or disiplining her. She will connect her behavior to the consequence and make choices. She will get that she is the boss of her own actions, and if she doesn't want the consequence, she'll stop the bad behavior. It gives her confidence and makes her happier. Oddly enough, this isn't even the consequence for the bahavior, this was just the cooling down, stopping the behavior part. The consequence should be related to the behavior for a child to connect the two. After she is calm and wants to play with her sister, who she just bit or pinched or whatever, she shouldn't be allowed. "It's sad you have decided you can't play with your big sis nicely. Hopefully soon, you can play with her without biting." Redirect her to something else that isn't a punishment, but that she can feel the "pain" of her consequence so the message is received. Then after a period of time that you decide, ask "Are you ready to play with your big sis nicely? Wonderful! I'm so proud of you for doing the right thing!"
Sounds cheezy and all get out but let me tell you, it works!
Also, very important. The child isn't good or bad, it's the behavior. Not that you mentioned that, or say that, but it's big in the message. "Quit being bad" or "Start being good" is not the message that creates "good" kids.
Good luck and if you decide to try it, please post how it went!