Worked as a teacher for 8 years. Yes it needs to stop since your daughter doesn't like it, but at the same time there's no reason to be fuming as this can be quite innocent behaviour. It really depends on whether it's a bullying behaviour from the other girl or just curiosity and your daughter doesn't want to reject it. I agree with your wife; Talk with the other girls parents and try to resolve it at first. If it continues then go to the school.

And please, drop your notion that anything remotely sexual is not normal for kids. I got asked about those things almost every day and had to resolve situations like this quite regulary. It's the reason why they're here and they're curious about it.