my own DD had something similar happen with a boy at School, she was slightly older in that it started at 6/7 though from what you say, thankfully to a much lesser degree, it did traumatise her though, but along with a lot of other stuff that went on too.
We found the School Counselling service to be a brilliant help, it gave DD somewhere she could go & let of steam & talk if she choose without the obvious upset it causes us to hear it - regardless of how calm we keep, kids can sense our feelings & it doesn't really help them:(
I'm presuming your own DD is a t School, so ask there about the Counselling service, there will be a trained Child Phsyc who visits the local Schools on certain days - & if the incidents didn't happen in School & they know - I would also advise speaking with her Teacher too - she can keep an eye on her & help stop her continuing the abuse she's learnt with other kids at School - its a bit like rot, sadly it spreads if not checked :( - this happened a little with my DDs friends - though I'm pleased to say that a year or so down the line, its almost forgotten, all back to normal & hasn't seemed to damage her in any way at all :)
Theres also a fine line with young kids, where as you making an issue of it with her actions towards your younger DD, it can become attention seeking behaviour & end up with her doing it more - its a very difficult one to balance I'm afraid, so the counselling service will be able to help you there too -
you could also speak with your local Childrens Information Service - they might be able to offer you other advice on other places to go for help too
I feel for you & wish you & your DD the best of luck :)