Maybe your SIL means well. Maybe part of your issue is that it's not on for her to 'correct you', especially in front of your daughter. Would she like it if she had a daughter and you turned the tables?
Point is, you are the parent, not her. And if she has a problem with you using words like 'pretty', then she should perhaps discuss that with you, not give your daughter contradictory instructions, or witter on at a 3 year old about 'not wanting to impress a man' (point 4). Perhaps counter with "And remember, she's 3 and perfectly okay to copy her mum if she wants, and when she's older she can decide for herself whether she wants to wear makeup or not - as I am sure you do. A 3 year old doesn't need that kind of advice, thank you. "
I mean it's all well and good people telling you to relax, but maybe the SIL should. Your daughter is 3! She is bound to copy her mum, so what?
Again, as for appearances, so what? I for one will state that there were many times I was encouraged to be pretty. Being pretty did not, however, discourage me from climbing trees or playing football by the time I was 7 upwards. I also made mud pies, played conkers to win, and was pretty aggressive in sports. Schools these days, can easily provide outlets for your daughter to explore stuff like that in a non-gender-stereotype way. It's only if you were to stop her from trying out football etc, just because of stereotypes about what girls shouldn't do, that it would feel off to me.
There is nothing wrong with a girl being pretty, nothing at all. I also think there is nothing wrong with me looking pretty for myself, and for my DH, because after all, my DH makes an effort for me, and anyway, I like to put on make up etc now and then.
And for all the harping against girls/women 'being pretty', it would be interesting to see how many of those against it REALLY apply it in their own lives. I don't see Boots giving up the cosmetics departments. I don't see major beauty brands closing shop. Stores are still selling pretty dresses and skirts, mostly to women and girls. I don't see 'pretty' going out of fashion. I don't see why you, I or anyone else should conform to gender stereotypes, but I don't see why we should conform to anyone else's ideas of whether or not I should look pretty, either. Does your SIL ever where makeup? Does she dress up or would she go out looking like a slob because appearance doesn't matter? Despite what she says, do her daily habits, clothes etc, match the convictions she spouts at YOUR daughter. How did she attract your brother? If she is, in fact, a hypocrite, I wouldn't hesitate to point this out to her.
In short, whilst it could be argued you could take her with a pinch of salt, I hardly think it's for her to "correct" you in front of your own daughter. If she has her own daughter, she's free to bring them up as she sees fit. Would she like it if you "correct" her?