What to Do?

Last week, Steve and I were at a holiday party. During conversation, one of the guests used an ethnic slur. Neither of us knew the guest before the party, and we both let it pass, but the same thing can happen during any networking event. I feel that I should have said something, but couldn't wordsmith the right response that would have allowed the offender to listen as opposed to becoming defensive. I took the cowardly way out. I don't feel so good about that.

What would you have done?