Here is a wonderful recommendation by Beth Garcia, from PositiveDiscipline yahoo group:

To me the majority of these names are just silly. I'd get silly back- "Tooshie butt!! Well, you better not call me an elephant!", "What? I can't believe you called me elephant, okay, just don't call me penguin". Eventually we're laughing and chasing and the whole thing has blown over. Now, for "shut up", we've been very consistent with telling him "that isn't a nice thing to say, you may say 'be quiet please', or 'I don't like what you said', etc.". Yes, my DH feels he gets too much power but it really does work for us.

Of course if one of our relatives/friends uses the phrase he has no trouble telling them "that isn't a nice thing to say" ;) Luckily everyone has agreed with him after being slightly taken aback being corrected by an almost 5yr. old. You big idiot would likely get the same response "That is not a nice thing to say, it hurts people's feelings. Can you think of a different way to say what you want or do you need help?". Once we've settled on an acceptable alternative we just remind him of that response. If he refuses (after several attempts, so it may be weeks) we simply say "I don't want to stay here while you are calling names. I'll come back when we've both calmed down" and we walk away. With our son this is usually enough for him to realize the boundary isn't going to budge and he will use the agreed upon response. We've also been very proactive in telling him that it is okay for him to say "I'm angry with you", "I'm sad/mad/frustrated at you". We acknowledge that and tell him it is okay. We've noticed his almost 4yr. old cousin is now starting to use the same phrases instead of hitting so much :)

Beth