J.T.
Children do grow fast don't they! I have boys, but I have still had to address this. I simply tell what a beautiful thing it is for a mommy to have a baby and that girls are given a super special gift of being a mommy. I have also mentioned that when a mommy is pregnant--the baby will be ready to come out at just the right time and it will come out "down there" pointing in a vague way. Most of the time that has been enough to satisfy the curiosity. It will come up again later, but it is always best to be honest, I think. I have never had to really explain yet, that it takes a certain activity to cause the baby to grow in the first place, but I have said that when a Mommy and Daddy love each other very much there love can make a baby grow if they choose to have (more) children.
I definitely think that you gently inquire what or where they may have been hearing things from. It is OK to state correct factual details instead of letting your child believe who knows what kind of blown out of proportion story they may have heard at school! The topic isn't as important as the willingness you show to listen and answer! They need to have that open, non judgmental (in words or body language), gentle, listening ear of a Mom to be able to open up to. If you drill them with questions it will close up the doors of communication.
Soak up the moments of innocence, it is truly a beautiful thing!