It's actually "Look who's talking !" ( who's = who is ) Is used when someone says something (usually bad) about another person. But the same bad thing is also true about the speaker! Something like : John says to George "You are a liar! " . If John is actually a bigger liar , George can fight back and say "Look who's talking ! " (meaning "You are a liar, too ! " )

You don't need to answer it, it's a sarcasm.

If someone calls you a rude name etc you can reply, "It takes one to know one!" Then just walk away.