It's not suprising that he would deny it today, because today he knows it's wrong. whereas yesterday he might not have known. Kissing, touching, and all of the associted things come quite naturally to children and many parents are surprised at how young children exhibit sexual behavior. Sometimes it could be something they saw on television, sometimes its something they see other people to, sometimes they do it because it feels good, and sometimes, you have to look toward darker motives. When a child is being touched by someone else, whether an adult or a child, he will 99% of the time, turn around a repeat this action on another child. When we think of molesters, we thing of the "strange" but most molesters are someone in the family circle, uncle, aunt, cousin, sibling, fellow student, teacher, etc. I'm not saying this is the case, only that you keep your mind open to all possibilities.
Since he has expressed this interest, you will need to talk to him. Not to blow it out of proportion, but just to have talks with him to get him used to discussing these things with you, and knowing that he can dicuss them with you openly and without judgement.
First off, it's not easy, but you want me to tell you something you don't already know, lol. The best thing is not to sit him down for the 'talk'. Instead, just bring up things one at a time at various times of relaxation. You might be driving to the store, turn down the radio a bit, and ask "Hey, I was wondering, do kids in your class have boyfriends and girlfriends?" and see what his response is. Maybe in the evening the two of you are sitting on the couch or laying across his bed, and you can ask, "do any of the kids in your class talk about sex?" You can go from that to,
how do you feel about having a girlfriend?
are any of your friends having sex?
do you think kids your age are prepared for that?
has your body been feeling different to you?
have you noticed anything different (hair, emotions, etc)
After a while, you will find it easier to have general conversations about girls, relationships, and then eventually move onto the sex discussions. Try to be matter of fact about it, even clinical. Don't act embarrassed, or he will feel embarrassed. Don't let him wiggle out of it, keep a straight face and act like it's totally normal to talk about these things, even if you don't feel that way. Sex education is something that should begin as soon as a child can talk, and should be something that is talked about at the very least every few months, until they are adults, and even then they should know that if they need/want to talk that you are open and available to them. Of course it's going to feel embarrassing to one or both of you, but its up to you to let him know there's no shame or embarrassment. Sex/masturbation is not a bad thing, in fact it can be very enjoyable in the correct context and thats what he really needs to understand. Masturbation isn't a bad thing, like touching his body is not a bad thing, as long as it's in private. He has to live with his body for the rest of his life, so he should know everything about it.
Also let him know that people will tell him all kinds of things about sex, but that he should always seek to find the truth out for himself, by talking to you or someone he feels comfortable talking to. There are many books, broken up by age category that you can get, some with pictures that can help to talk and discuss things.
As for masturbation in particular, let him know that his body is his own, and that he should not let anyone touch him, nor should he touch others. Especially since h e has been 'touching' kids at school, let him know that it's not his right to impose himself on others. I know it's hard, my sister just asked me to have the 'talk' with my nephew who will be 11 this month, to give you an idea of how thorough I tried to be we talked about
his friends and sex (are they having or not)
girls he likes, girls who like him
other terminology for sperm (ejaculation, cum, orgasm)
how sperm meets the egg
other names for masturbation
sex before or after marriage
HIV, herpes, gonnorhea, chlamydia, etc
birth control (he wanted to know why guys cant take a pill)
sex and the law for your state
oral sex and different expressions for it
sex in movies, commercials, on the computer
Of course ther might be things you just don't feel comfortable talking about, in which case you can ask a male (or female) family member to help, you can buy a book on it, or if its something you think he can wait a while to know, you can simply tell him, you're not old enough for that right now in my opinion, and we will revisit that when you are ___. Kids usually will understand and accept that.
If you have any questions on what or how we talked about any of those things just let me know. I welcome your thoughts, let me know if you have any other questions.