I know that it's a real trend nowadays to not punish or scold your child when they self-stimulate...the thinking behind it, of course, is that you'll make them ashamed of their bodies which could someday backfire in the form of sexual problems, yada yada yada.
But honestly? It's a bad habit. No different (at this age) than picking her nose and eating it. When she does something like that, do you tell her to "do it in private" or do you simply tell her to cut it out?
I truly don't believe for one second that telling your child to stop messing with her "private-spot" will somehow damage her little psyche and cause permantent emotional scarring. If you need to scold her, do it! Heck, if you need to put her in timeout until she stops, what's the problem with that? Do NOT make a big deal of it, however. There are ways to casually discourage behavior without making it a huge production or drawing unnecessary attention to it.
You can reinforce to her the idea of doing it in "private", but I'm pretty sure kids are smart enough to figure out that doing things when grown-ups can't see them means they won't get busted.
From a very young age, my daughter would "gyrate" (rub herself) against the crotch strap in her carseat. It wasn't a huge problem, thank goodness, because it was limited to the car, but as she got older she would sort of zone out while she was doing it....even trailing off in the middle of a sentence. It wasn't a terrible thing at all, and I wasn't worried about it being abnormal. But I didn't want her doing it, either, so I had no problem whatsoever patting her legs and telling her to put them down (she would stretch them straight out when doing it).
So maybe you would be more comfortable with something like that? Find a way to discourage the behavior without actually identifying it. For example, you could tell her to stop putting her hand down her pants instead of coming right out and saying "quit touching yourself!". I'm not sure exactly what her "methods" are, of course, but you get the idea.
As for my daughter, she never completely stopped the "gyrating" until we finally upgraded her to a booster seat that uses the vehicle's seatbelt. So no more crotch strap, yay!