Answer:
She said she<u> was wearing</u> her sister's jacket.
Explanation:
Reported speech involves shifting the tense back to the past. In that matter, the Present Continuous turns into Past Continuous in reported speech. Thus, in the sentence given, in direct speech, the verb <em>'m wearing</em> becomes <em>was wearing</em> in reported speech.
Apart from changes in verb tenses, other words such as pronouns, demonstratives and adverb phrases also change in reported speech. For example, <em>my sister</em> is reported as <em>her sister</em>.
