Don't tell her off... Just say quietly to her, please don't say that... then ignore her when she laughs... I would also remove her from any situation and make her be on her own for a while... if she wants to call people that name, she has to realise that people arn't going to want to be around her, including you.
Tia when through a stage around 4ish calling people bum in Spanish... she'd picked it up from school... and obviously thought it was funny because all the other kids did... When she realised that mummy didn't find it funny or that she couldn't get my attention by saying it, she stopped.
Now she uses the Spanish f word a lot if she's frustrated at things etc... She uses it in the right context though (although I wish not as frequently as she does) but then we all swear to some extent... and as long as we can get the swearing restricted to the right context then that's a much better solution. Thing is I swear, so can't tell her not to, but I do not agree with swearing AT people. So like the other day when she dropped her dinner plate and broke it, she swore loudly, exactly as I would have done... but if we have an argument we never swear or call each other names... that's a lack of respect.
Thing is you LO would have had to have picked this up from someone/somewhere... and has now realised that she can get a reaction out of mummy if she says it.... Either you need to find out where this swearing is coming from and restrict it at the source (if possible) or you need to make her aware that you aren't interested in her when she uses that language.
The thing is that children say things as they are so the teachers prob agreed wholeheartedly with your nephew and the kid he called a smelly willy prob was! 
