We must be living parallel lives! DD26months does exactly the same thing. crazy DH is the one who gets to deal with it most of the time as he is at home with her right now, but I get my fair share in the evenings and on the weekends.

We went through the same thing with DD7 when she was this age, but the difference with her was that we were not living in the US at the time, so we were sort of comforted (like Oli) with the knowledge that she was only being understood by about 1/4 of the people she was talking to. (Little comfort, I know)

We actually found with DD7 that if we didn't correct her until a few minutes later we'd have less of an aggressive response like what you described with the woman in the restaurant. We would tell her immediately that what she said was not polite or appropriate or nice or not something she should say, but we went into the reasons behind it and alternatives to say later when we were removed from the situation.

We apologized more times than I can count for her when she was 2 though. Most of the time the person she was talking about would be so taken aback by this little person speaking so well that they were less offended than we thought they'd be.

Even to this day DD7 will comment on things like this, but she has learned that if she is going to do this she needs to do it quietly in my ear, or wait until later to say something. I think it has been interesting listening to her try to explain to DD26mths that doing this is not allowed.

Just remember that at 2 the understanding that words have an affect on others isn't completely developed. Neither is the abililty to control the volume with which things come out of their mouths.

Hang in there, it is just a phase and as such it too will pass.