Our kids are our kids. We don't choose them, we just choose to make them. I am a mom of a 4 year old and a nanny of 6 children between the ages of 3 and 5. They all say the darnedest things to each other, but I've never in my over 6 years of childcare experience, ever seen a child try to change something or do something totally against their nature because of something another kid has said. Your daughter wanted a little sister, ok. She's expressing her feelings... you can't be upset about that. From your story, it sounds like she said it after you caught him in the clothes, not as if she says it 5 times a day harassing him.
At 3yrs old, my daughter was at the park and some kid told her she was black. She never once asked if she can turn her skin white because it's true... she is black. At this age, they only know that what they are and what they feel is true... they don't know anything else until they get older and discover that it's possible to change things. Eye color, hair color, straightening teeth, waxing/shaving... all that. At 4 years old, he knows that he is a boy, his sister is a girl, and dressing differently won't change that.
Though it could very well be a phase, what he feels is good to him and that's what he wants to do. Dressing in girl's clothing makes him happy (whether he truly likes it or wants to please his sister), and as parents, we thrive when are kids are happy. Why is it "scary" to you for him to wear it? Do you think he's going to grow up to be gay or a cross dresser? Whats wrong with that? He's still your son, and you loved him the very moment he was born... why should that change because of what he wears or what he grows up to be? If the tables were turned (and this is a real scenario that a lot of people face), and 10 years from now you realized you liked to wear mens clothing or you found a woman that just knocked you off your feet and became a lesbian... wouldn't you want your children and family to accept you and your lifestyle?
I just don't see anything wrong with it. If you make a big deal about it, so will they. But besides the clothing, you should try talking to them about their bodies. As I said, they already know what they are and that won't change, but you can try getting "Amazing You". It's a toddler book you can read to them about their bodies, what they are, and how our bodies change when we get older, but still stays the same. Its only about 10 pages. Very simple.