Oh, heck, let him alone. If you find him something else to do like a computer game and you'll be sorry. I guess if you are really disturbed by it, you need to find something benign for him to do with his hands--an idle hand is the devil's workshop? What does he love to sleep with? He obviously has found a way to feel comfort and feel good, so give him an alternative like a soft cuddly stuffed animal. Mostly, I think he is too young to say don't do that "because..." He won't understand and I think he'll get some neurotic unhealthy message about his private parts. I think I didn't say anything to my son about it until he was about 4 when I started explaining that people had "private parts" and that only he can touch, or mommy or the doctor if he says ok. After that lesson goes in for a while, you include the idea that you only play with private parts in private, like the bathroom or in bed.
Oh those silly private parts cause so much trouble.