My sister has a strange obsession with cutting dolls/teddies. should i be worried?

Yes: Depending on her age, iq, and physical health status, i would have questions about a history of abuse (that you may or may not know about), & possible diagnoses such as borderline personality, schizophrenia, substance abuse, etc. It is not a large step from what she is doing to self cutting. Referral to a mental health professional or family physician is indicated.