I agree with what musicmama said. My son started in on his large teddy bear around 5 yrs of age. I think that as long as there has not been any type of sexual abuse or exposure to anything graphic in that nature (there does not have to be) you can write it off as something that they just happened to come by that felt good to them.
My husband was initially upset when he heard about it and talked long and hard to my little boy about why he cannot do it and all. But the real kicker was when my mother-in-law told him to just ignore the whole thing as a passing phase b/c my husband was guilty of doing this himself!!!
Has he been exposed to some sort of sexual experience? Even if he has, he needs to know you won't freak out over this. He needs to feel loved and accepted, so tread lightly. I would discuss as much as you think he is ready about sex (that it is between adults in a private place for example) I would stress that this type of behavior has to be done in a private place. By having to go to a private place, he will be aware of what he is doing and may want to quit in order to stay in the area with others. I would watch him closely, especially around other children.
Good luck and God Bless.