My youngest daughter engaged in similar behavior from about age one through first grade, except her activity of choice was "humpping" her blanket. We were told this is very much typical behavior for a child who has not been molested. I agree completely with what treazzure007 said, as does the psycholigist we consulted several years ago. If it's any comfort to you, she is now 16 years old, very well adjusted (considering her age!) and if she still does this, it's in privacy. Try not to worry!
tell her to do it in private
Very normal behavior while assuming she hasnt been touched or molested by anyone. Children do this. They find out something feels good to them and they go for it. When we see it, we see it as sexual. I suggest that you not draw attention to it or make her feel ashamed of it. Some people have suggested on here that she be told to not do these type of things around people at all. Do them in the privacy of her own room. My husband and I simply told my 6 yr old son he cant do it in the open as well. He was beginning to touch himself and we caught him grinding on his giant teddy bear. He probably does still do it while in bed or something though. But, now he knows it's private.
Hope this helps