I agree very strongly with PTP. DD asked when she was 4, because we had a pregnant friend and it made her start thinking and worrying about being pregnant (the things these kids think of). I explained it without huge detail, but enough and with 'real' words. One question led to another (because of course she wanted to know why she couldn't get pregnant at her age etc, etc) and so we talked about puberty, sex and pregnancy. I described the p - v aspect and ultimately called it a 'special kind of hug' (though I covered why it was different to other kinds of hugs - knowing full well she'd start worrying about 'hugs') and that she will be in control of when it happens (she incidentally, has declared she will never have that kind of hug).
I think it's so important - especially for girls (I know I say that here a lot!) - to understand the real names for their body parts, that their genitals are nothing to be ashamed of and to understand that they own and are in charge of their bodies. You can't empower kids without giving them information.
Here's a link to an Australian Govt web page on talking about sex with young kids, inc the realities of sex education (i.e. "research indicates that children who have a clear understanding of sexual issues are more likely to behave responsibly, for example, waiting until they are older before they start having sex, and choosing to use contraceptives") and how to deal with experimentation:
http://www.betterhealth.vic.gov.au/bhcv2/bhcarticles.nsf/pages/Sex_education_preschoolers?open
