K.C.
When my son was 3, I got a call from his pre-school saying he had exposed himself and was touching himself during naptime. They had a real problem with it, as you can imagine. At that age, they're completely unaware of the sexual nature of such things - he just knew it felt good...totally innocent. When I brought him home later, I told him that it's his body and he had a right to touch it, BUT if he wanted to touch his private parts (and we talked a bit about that), he needed to make sure it was in the privacy of his own room and NOWHERE ELSE because it's not appropriate, like farting or spitting. Now he's 10 and it's never been a problem since. I think, like your daughter said, it feels good and she sees nothing wrong with it. Tread lightly here - you don't want to give your daughter a complex and make her think there's something to be ashamed of about her body (unless, of course, you do believe it to be wrong and shameful - some people do and that's their right). Good luck!