I have a three year old that is very interested in girl toys, dress ups, etc. It started about the time he was 2. He has an older sister who has barbies. He would go in her room and steal them and play with them. If there is a movie, toy, or tv program, he focuses on the girl. He pretends to be a girl. He loves mermaids and disney princesses. He has some interest in boy toys, but when we are at the store, he wants to go right to the pink section. He steals my daughters clothes to dress up in. We have a superman cape that he will sometimes wear, but plays longer in girl dress ups. We try not to discourage, but don't really encourage. I can't stop him from grabbing a shirt from the laundry. I do have him get back in his own clothes before we leave the house, but I let him wear whatever he wants when we are in the house. He plays with boys and girls. We are trying to introduce more "characters" then princesses, such as peter pan and pinnochio.
My concern is much more with identity, then if he has leanings towards being gay. I don't think dressing up like a girl makes you gay, but I do think that it may cause some gender identity problems. I would hate for him to feel uncomfortable in his own skin....but, I also think that we help shape our children and I don't really want to indulge him with all of his choices. He does play with his older brother and their play is based on less "frilly" things.
I also would like to hear from other moms who have been through this...especially if your children are older, like school age. I worry about him finding a peer group when he gets older.