Your sister is right. "What?" is insulting when the person talking to you believes he/she was being perfectly clear. It's usually used when the phrase someone said is confusing, shocking, or both, rather than when you didn't hear something. For example, when someone said "There are crows on the porch", and you think you heard "The wolves ate the church".
In my case, "What did you say, baby?" would be even worse. Your profile says you're from the South; I've traveled there, so I'm aware of their regional customs. I'm from the Midwest, where words like "baby" or "honey" are reserved for people you're romantically involved with. So I usually use "What were you saying?", "Sorry, I didn't hear what you said", or more tersely, "What was that?". When talking to authority figures, like bosses, I say "I heard you say...", followed by repeating back to them what I heard, followed by "Is that what you were saying?".
People who served in the US military have a tendency to use "Say again", a self-explanatory military term, due to a very strict taboo on the word "repeat" and the ambiguity of the word "what" (in the military, "repeat" means to fire at the same target for the second time).
Last edited by Aspie1 on 17 Nov 2013, 11:41 am, edited 1 time in total.