Yes it is correct. For example Person A. Isn't it terrible about the tsunami and earthquake in Japan? Person B. Yes it is, you don't really know what to do, do you? "What to do?" can also mean "What can I do?" or "what are we going to do about something."

No. "What to do" is more like what Jura said. "It's raining out and I've forgotten my raincoat at my aunts house. What am I to do?" = "What am I going to do/what will I do?"...if you want to ask what someone is doing, you can say, "what are you doing?" or "what's going on?" or even "what are you up to?"

does it mean '' what r u doing ?'' ?

sorry I misunderstood

It depends on the situation and the conversation. Can you expand a little more?