In a child's innocence....heartbreaking comment

Yesterday as I was doing some scrapbooking, my 5 year old daughter came into the office, asking me what I was doing. I told her that I'm doing a scrap page for her life book and showed her what I had done so far. She said that is nice and asked me, "where is my lifebook". I told her over there on the other table and she went over to it, sat down and started paging thru it. She started asking me questions about this and that, as I continued my scrapbooking, intent to get my project done before dinner, I would answer her without looking at her. She came to a picture of my sister laying on the couch pregnant with her son, as my newborn daughter laid cuddled up into her. She pointed to my sisters belly and said," is that N in there". I've pasted the picture below to share. Sensing an upcoming conversation that might require my attention, I put down my scrapbooking and come take a seat next to her, "yes it is," I say. "That is N in that big belly, she says to herself pointing to my sisters huge belly. She turns to me and asks, "and you were in Nana's belly?" and I said that is right, and she gets quiet........ and I say to her, "and whose belly did you grow in?" and she said "P's belly" and I said, "that is right" and she smiles. I asked her if she wanted to see a picture of P with her BIG (I exaggerate the world big and she laughs) belly, her eye's lite up as I point to the picture. "Look Ma, there is me as a new baby, and there is P's big belly, she says as she laughs and falls backward onto the floor, giggling. "I was in there?" and I said yes, and here is a picture of P holding when you were 3 days old and here is another one of P kissing you on your her big chipmunk cheeks that you had as a newborn. "Oh yeah, she says as she giggles, looking at the pictures and then points to another picture, "and here is one of you Mommy and P and me" and I say that is right, and she giggles. Then her giggles left her and I saw a shadow come over her hazel eye's, as they turned storm like and questioning, she looked at me and said, "P didn't want me so she gave me away?" Tears sprung to my eyes, but didn't overflow and I touched her little leg and I said, "no honey, P wanted you very much, she loves you very much, she couldn't take care of you the way she wanted you be taken care of. Oh she say's, her chipper little self returning, as she turns the pages and starts to pointing out other pictures and how little she was, and here is daddy with her swimming in the pool, etc. Later that night, I pondered over and over why she would say that, that P didn't want her. We never said that. I went to bed feeling uneasy about it all..... bothered as why she would say that. In the morning, it came to me.... She associated her giving her little girl friend some of her old toys because she no longer wanted them, with herself being given as a baby and just assumed that because she doesn't want her toys she gives them away, that P must not have wanted her. That has to be how she got there. Lately we have been cleaning together and I will make her go thru her old clothes and toys and put 5 items in the bag that she doesn't want or play with any longer. Somehow I think she got these two things mixed up, at least I hope that is how she came to that statement! ;) I'm glad I caught this. I'm glad she didn't continue thinking this to herself, that she wasn't wanted. Has anyone else crossed any similar bridges with their children. Do you think I handled this in the right manner?