My two both do it. Here's what I found on the net:
Teeth grinding, technically known as bruxism, is a common night-time habit in many toddlers. About half of young children grind their teeth at one point or another. This behaviour usually starts around 10 months, when your child's front teeth - two on the top and two on the bottom - have come in. Teeth grinding can continue into toddlerhood and beyond. Some children grind their teeth all night long, while others do it off and on.
What you can do about it Basically, don't worry. The sound may be nerve-racking for you, but the grinding won't hurt your toddler's teeth and she'll outgrow this habit eventually. A low-key approach is best; making a big deal out of it may only make your toddler anxious and encourage the grinding. If you are concerned about her teeth, talk to the dentist when you next take her for a check-up.
Dd4 still grinds her teeth and she is 5, I still grind mine and so does my mum, our teeth are fine If it does start to affect their teeth you can get a special gaurd for them to wear at night but we have never needed to get one.