I have a 28 month old daughter who has taken to smearing her feces.
She will be fully clothed and in her diaper, have a BM, and then reach
in and smear her feces. The first time she did it, she was in her bed;
now it has happened many places in the house, about 12 times now in
the past 3 months.
She has a baby brother 7 months old. I am at home with my 2 children
fulltime right now, so she is unattended very infrequently.  She has
started toilet training which has proceed to this point:  she sits on
the potty and occasionally goes pee-pee.
What is the best way to handle this recent occurrence...the main
principle?  What is at the root of it? Thank you.

In response to your question, may I refer you to two published
Internet Q & A articles dealing with the same subject.

Today?s Parent
Playing With Feces: By Janet Morrison
http://www.todaysparent.com/toddler/askus/article.jsp?content=20030903_100943_4180&page=1

and/or
 
Dr. Spock
Ask Dr. Needleman: Smearing Feces at 21 Months 
http://www.drspock.com/faq/0,1511,8333,00.html

I like the suggestion in one of the articles of catching a child doing
wanted behavior and rewarding that behavior with a hug or "Good job!"
instead of only giving attention to the negative or unwanted behavior.

Good luck and I hope this helps you in solving the problem.

My daughter did the same thing, at the same age.  I tried everything-
even bribery.  However, the only thing that worked was the following: 
Reverse Psychology!

I would say, "Now don't you go poo poo in the toilet.  Don't you do
it!" and she would reply "I am going to do it!  I'm going to do it!" 
and actually did.  I would use a fun, joking tone and she responded by
going number two where she should.  The days of cleaning walls, toys,
carpets, were over and she has been completely trained ever since the
first day of my challenges.  I think it had something to do with the
fact that she felt empowered and rebellious!  It might sound foolish,
but it worked for me!