In the review process is it legal for my boss to ask me if I am looking for another job because she "heard a rumor."

What is the best response for continued employment?

Be Honest.

I agree - be honest. Best policy. If you lie and it is found out, chances are you are going to be headed out the door. People are terminated for less than that often enough.

Now you can call your local Job Service and ask to speak to an HR counselor. That person would know the law as it pertains in your state.