It could be that he is gay. Although neither us nor his counselor believe that to be the case. In any case we've tried to assure him that no matter what we still love him the same. I'm wondering how or why a ten year old is having sexual thoughts gay or straight.
First of all, this is so important and I love that you told him that you'll still love him. I hate to sound like "love cures all" but major kudos for not being fearful of it and supporting your child. It shows me you have the skills and talent to get through this together.
Having said that, I am not a parent so I won't give advice. I have been dating a woman for almost a year who has a 3-4 year old and I'm struggling with him, so no advice to really contribute. What I can do is talk about me as a kid with some emotional shortcomings. I was originally thought to be what we now call "on the spectrum." Back then it was called emotionally disturbed or "doesn't play well with others." I may be very slightly but it doesn't really show - likely because 44 years of peer interactions has allowed me to find ways of operating in ways that make me appear "normal."
The last sentence I can talk about. I had sexual thoughts VERY early. Like 5 years old. I got the birds and bees talk when I was 5 because I was asking so many questions. I actually remember it and I remember understanding everything about it except one thing: Dad gave me the talk and then I had more questions from Mom. She talked about how "when two people love each other..." and "take off their clothes...." and "tab A, slot B" (paraphrasing), and the one thing I couldn't figure out was why did they have to be naked? You could accomplish the same thing by just undoing a button and a zipper, right? She tried carefully explaining what I now know to be intimacy and vulnerability and how nudity is a really awesome thing, but at the time the naked part was the only thing I didn't understand.
If what this other kid is saying to yours is something that includes words that imply your son is gay, or homophobic content, it is quite possible that your son is inferring that gay is bad, and therefore his reaction is simply fear of discovering he is something that is bad in the eyes of certain others... even though he may not be even close to the point where that realization is on his radar. Kind of like if one girl says to another girl, "you're going to be fat when you grow up and nobody likes fat girls." Its not that being fat is bad, and she may not even be old enough to have a body image yet, but those words could cause the girl to infer that fat=bad and "oh geez, what if I DO grow up to be this thing they call fat. That sounds terrible." I'm simply thinking that its possible that your son doesn't HAVE those sexual ideas yet, but if this other kid is saying "gay is bad, and you will be one," it could be mixing with his beginnings of sexual awakening in a not-safe environment. I remember the first time I saw a naked woman in a magazine. It was a little too early in my development and I remember thinking it was pretty yucky. It didn't scar me for life, but it was a bit violating. I'm just saying that maybe this other kid is introducing your son to sexual conversation topics before your son is ready to assimilate it and that is the cause of the discomfort. Let's face it... we all had aspects of our lives that were introduced to us by our peers before we were ready to learn about them. Not saying its right or wrong, just saying we learn a lot at that age from our peers and since each kid is on a different path, they all get schooled in certain things earlier than others.
If you ask my girlfriend's 4-year-old if he wants to have a girlfriend or a boyfriend, he will say girlfriend. Usually with an incredulous look on his face like "silly Curtis, of course I like girls." But the truth is, he probably has no idea yet what gender he likes to be naked with, he's just responding to all the input from society that he has assimilated. Nearly all of the loving couples he sees are male-female. If it were closer to 50/50, his response might be different, but the point is its possible to answer that question at his age without any reference to attraction or gender. The answer sometimes just gets coughed up based on "well, everyone I see is with the opposite gender, so that must be the right answer." A metaphor: Think of a Miata as having a heterosexual preference. I know that Miata is the right answer, but until I've driven one, I don't really know. A boy might say "I like girls" because everyone around him demonstrates that being with a girl is right, but until he has sexual tendencies he can't really know. So I type on this board all the time that Miata is the answer. But my only experience with them is driving one about 15 years ago in a parking lot. So I SAY that Miata is the answer, but I drive an F150. Make sense? I might test drive a Miata and suddenly realize that I was wrong about my driving preferences.
I think I just boiled gender preference down to saying Miatas are straight and F150s are gay... but I hope it made sense.
The good news is this: I consider myself at 44 (and mostly straight) to have a history of incredibly healthy expressions of sexuality. Of course there were a couple in college that were just about getting laid, but I'm in a very healthy and aware place about my sexuality and how it is shared with others. While this encounter with your son is very important and needs to be approached the right way, there is definitely a bright light on the other side.
and your love for him is obvious and big, so you have the right foundation to get you there.