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No, it doesn't. This etymology of the word "Muppet" was first promulgated by none other than Jim Henson himself. However, he later recanted the story, thus making the answer to the question a definitive "no". This page examines the evidence that the name "Muppet" was coined by combining the words "marionette" and "puppet."
- 1960: "They're called Muppets because they're neither puppets nor marionettes, but kind of a combination." Dave Garroway on The Today Show
- 1974: "This year Sesame Street's educational and entertaining format will be joined by...Poco Loco, a parrot 'Muppet' (the word combines "marionette" and "puppet")..." (Sesame Street season 6 press release)
- 1977: "The Hensons brought the lovable Muppets (the name is an amalgam of marionette and puppet) to Sesame Street seven years ago to make reading and counting fun for preschool children." ("Is This Any Way for Grownups to Make a Living? Yes, for Muppet Masters Jim & Jane Henson", Nellie Blagden, People, November 7.)
- 1978: "The name Muppet, by the way, was coined by Jim to represent his own individual puppet designs, a combination of 'marionette' and 'puppet.'" (Muppet Show Fan Club Newsletter vol. 1, no. 5.)
- 1978: "Now I would like to point out that the name Muppet is a combination of the word 'marionette' and 'puppet'." -- Dr. Jerry Nelson, while giving a speech on the Muppets' history, The Vent Event
- 2001: "Jim came up with the name Muppets during the Sam and Friends years -- it is a combination of the words marionettes and puppets." (Jim Henson's Designs and Doodles, Alison Inches.)
- 1956: "A Muppet, according to Henson, is a cross between a hand puppet and a stick puppet. Henson thought up the term Muppet in order to 'have something distinctive.'" (Washington Post, September 2.)
- 1957: "Jim devised the name 'muppets' for his brainchildren, because they're a cross between stick and hand puppets." ("For Jane and Jim, Rollicking Muppets Set a Merry Pace", Katharine Elson, Washington Post and Times Herald, February 17.)
- 1978: "The word was coined from 'marionette' and 'puppet', says Jim Henson, 42, the skinny, bearded Zeus from whose brow the creatures began to spring 20-odd years ago, when he was a teenager hooked on television... Like other geniuses, Henson is a sly fellow whose sound artistic instinct is to resist critical analysis... Now he backtracks and says that "muppet" was simply a word that sounded good to him. The sound combination of puppet and marionette is merely an explanation that happens to sound logical." ("Those Marvelous Muppets", John Skow, Time Magazine, December 25.)
- 1983: "I think we did the term Muppets before we got the show Sam and Friends - a few months after I started working. It was really just a term we made up. For a long time I would tell people it was a combination of marionettes and puppets but, basically, it was really just a word that we coined. We have done very few things connected with marionettes." (Jim Henson, quoted in: Harris, Judith P. "Of Precious Pigs, Singing Cabbages, and a Little Green Frog Named Kermit: The Story of Jim Henson and the Muppets" Cinefantastique, April/May.)
- 1984: "We told reporters the word was a combination of puppets and marionettes, but that wasn't true. We just coined it. We just made it up. We just said that to satisfy the reporters." (Jim Henson, quoted in The Sun, Vancouver B.C., page B9, July 10, 1984, from Baltimore Evening Sun) 
- 1986: "In actuality, Muppets was a word we just coined. It was merely to be the name of our act. ... I used to say to people that It was a combination of 'marionettes' and 'puppets.' But that was mostly an answer that I made up so that people who needed an answer would get an answer. But then I stopped telling this lie, and I'm back to the truth: It just came out of mid air." (Jim Henson, quoted in: Mitgang, Lee "Kermit the Frog turns 30" The Gettysburg Times, Tuesday, January 7, 1986.)
- 1986: "Well, you know, in reality it was just a word that we made up. I used to tell people that it was a combination of puppets and marionettes, but that was just sort of an answer so I would have something to tell people when they asked the question. I've stopped saying that now." (Jim Henson interview, Breakfast Time, July 2, 1986)
- 2001: "My parents came up with this name, 'Muppet,' because it was a funny, cute name... and some people say that they took the two words 'marionette,' which is a string puppet, and 'puppet,' and they put them together. But, we actually think that it's more that my father just thought it was a fun-sounding word." (Cheryl Henson, in A&E Biography: Sesame Street.)
- 2003: "'Muppet' was the name Henson came up with to describe the characters in 'Sam & Friends.' Some have said the term comes from combining 'marionette' and 'puppet.' Puppeteer Jane Henson said her husband just liked the word." (Shen, Fern "Do You Know the Muppet Man?" The Washington Post, Monday, September 22, 2003; p. C14.)