I've told DD the truth, she was around 4 when she asked and I said something like...
Mummy and Daddy decided they wanted to have baby, and only grown ups can have a baby
We made you by mixing up Mummy's eggs and Daddy's sperm in a place inside Mummy's body called a uterus.
You grew inside Mummy for a long time, and when it was time for you to be born, you came out of the hole between Mummy's legs called a vagina.
As time has gone on, we've expanded on the process, explaining about periods, what they are, when they might happen to her, more discussion about penises, vaginas, puberty, hormones etc.
DH and I both have the discussions with her as and when they crop up, because we want her to be able to discuss anything with us - we
don't say "ask your dad/mum" and so far she's accepted everything we've told her.
Just be honest. The more (appropriately) open you are the better, and it stops being embarrassing very quickly.