L.N.
I wasn't going to reply until I came upon the mom who has been telling her daughter that touching will make her hands stinky! Are you TRYING to make your daughter grow up to think she is 'bad, dirty and 'stinky''? That is exactly what you are doing and you may think it is no big thing, but she will have lifelong issues b/c of what is implied by what you say to her. You may think its 'not okay' to touch herself, but quit putting a sexual theme on something that is a natural exploration, please! Now if your kids start having problems with actual masturbation taking over their alone time, THEN I would respond with some gentle intervention....but lets not make our kids into perverts when they are so young.
Now to S.~ I would hate to think that there is something going on that isn't, so why not have her checked out by a psychiatrist or something? It wont hurt her, she won't even know why she is there, and as one mom said, you don't want to be sorry in retrospect. At least maybe it would give you a little more peace of mind when it turns out to be nothing but normal infant behavior.
~L.