are you niece and nephew going to counseling regularly? i don't think that it should be obvious that it's a big deal but it sure feels to me like it may be...sounds like something went on for one or both of them in foster care or somewhere... a lot of this is normal but it does seem from what you described as quite preoccupied w/ it...whomever is initiating the talk/behavior. it's very normal for your 3 yo to go along w/ it all...this happened to my daughter at about 2.5 w/ a 5 yo boy. it took everything in my power to remain cool and calm. i walked in and couldn't tell if they were pulling pants up or down (i did childcare in my home at that time) so i said "oh. what's goin' on guys?" and let them tell me their versions of what was up. his eyes were darting to and fro...omg he was a nervous wreck. i could tell he initiated something and something went down. when my daughter told me her side of what occurred he interrupted her trying to get her to shut up saying that's not what happened. he was full of *****. i told his mom and she said she'd been having concerns as she noticed when in there that at his dad's house dad had porno dvd's mixed in w/ the normal ones. yikes!
i wouldn't put the kids in time outs but if you do, have them take a break separately, just make sure you aren't shaming them. explain that our bodies are private, especially our privates and it's not something kids are to touch on each others bodies. at any time. whether another kid wants them to or not. sounds like you've already said that. the niece and/or nephew sound obsessed w/ private parts and that concerns me.
it sounds like maybe your mama bear came out BIG TIME as you want to protect your baby girl and maybe it triggered your inner child as well...and i totally hear you on that...i'm quite the mama bear myself!!! i hear you on feeling like it's all ruined...innoncence lost so to speak. it is heartbreaking, i know... recently my daughter's friend was over (my daughter is now 9), who is 8. we were joking about kissing practicing (my bad) and i said no you do it on your own arm or pillow. ugh my bad again. well her friend starts going at her arm and moaning and humping on the couch. i was APPALLED. i thought omg, what have i brought up here. and i thought, omg, this girl knows WAY TOO MUCH. she knows what i knew at that age from hearing and seeing my own mother having sex...ick. it haunts me to this day. disgusting. i told the girl to stop it. that that is NOT ok in my home or w/ my kids. my friend was over and he thought it was normal kid behavior. i was like THAT is not normal. that is learned behavior and that is downright scary to me. i limit that girls time here now and do not allow my daughter to go to her house as i know her mom is a drunk and they watch drama's that are really intense and probably include lots of sexual scenes.
i'm sorry you are going thru this. give us an update. i hope your niece and nephew get into therapy if they aren't already. not saying the foster care was a bad scene but....knowing what i know of adults who've been in foster care and group homes, well....you know the rest. the odds say where troubled kids are, trouble happens. from the adults often who are caring for them and/or the other kids in the places. because...well, it was done to them! ugh. my heart goes out to you. i'd say maybe limit their time together or be in neutral settings like playgrounds or such where they aren't in a 'homey' environment so preoccupied w/ touch and playing out what happens in 'home' environments in their experiences... hugs.