I've just moved this to the baby general discussion.

I personally don't think you are overreacting! I would definately not want my baby around another child who is saying those sorts of things. However, at 5 he is just using words he's heard before as well. He is probably having a real hard time dealing with the "newcomer" and often the older children show more issues once the baby starts crawling or moving more. Him reverting to baby behaviours is common... I don't know really.

I think you have every right to be upset especially when his mother doesn't take it too seriously about his calling your daughter that. I think you will need to talk with your partner about him taking a more active roll in supervising his daughter when around the nephew. That way he will see first hand and maybe take more actions...hopefully?