What mom isn’t worried about their kid finding a peer group when they get older?
Your son will be who he will be.
Please, please just let your son play, have fun, and be a toddler. Chances are very good, statistically, that what you’ve got is a heterosexual, gender-typical little boy who’s got a big sister. And he’s so tiny, his sister is a bigger influence than the gender rules out there, which he’s really too young to understand.
But you know what? If you don’t – if he’s not 100% gender conforming, if he does wind up being gay – you can’t change that. No way, no how. Sexuality and gender identity are inborn – they’re part of the “raw materials” people are born with. What you CAN determine is whether he feels loved, respected, and accepted for who he is. In other words, you have a huge role in how happy and confident he turns out to be. And it’s easy. All you have to do is step back, stop worrying, and let him be a little kid.
P.S. My son is 5, almost 6. His favorite color is pink. He’s not especially into sports,and he avoids rough-and-tumble play. And … he’s very popular with his peers. No problem whatsoever finding friends.
All kids are different, but I think this in completely normal. At age 3 their imaginations a love for creative play is exploding. My kids loved playing with both boy and girls things interchangeably. And both are secure in their identities as 7 (boy) and 8 (girl) year olds.
I think you’re doing exactly the right thing. Let him play the way he wants. Don’t discourage and try not to encourage if you aren’t comfortable. I don’t remember that we encouraged… we certainly didn’t discourage. It was just who he was and we let him dress how he wanted and play with what he wanted.
My son was/is a very creative imaginative kid. For his first 5 years of life he was in costume…everywhere we went. Bear costumes, spiderman costumes, a skin tight leopard unitard (one of my favorites), a princess dress and rain boots, unicorn ears with the leopard suit and a horse tail. Sometimes he was just dressed in all red and was a red panda. Now he’s grown out of the dressing up (mostly) and he loves sports and all things boy. He still makes up elaborate games with different characters and scenes. He also makes things with whatever he has. A straw and toothpicks keeps him entertained for an hour, and I’m not kidding. He’s a happy boy with lots of friends.
Your boy sounds completely healthy, normal, and delightful, actually.
Good luck 
My son wanted to BE a girl when he was 3yo. I was ok with that, told him he had to wait until he was 18 to make a real decision about it (can you imagine how far away 18 feels to a 3yo? lol) and let him play however he wanted. If he was with girls, he would play dress up, tutus, ballet slippers, jewelery, the whole 9 yards. If he was with boys, it was climbing trees and riding bikes and making bows and arrows.
You can’t change their gender identity. Some cultures allow for more than two genders, did you know that? This has been proven over and over by parents with children who are born androgynous, having chosen a gender for them at birth, and then finding out the child identifies with the opposite one chosen later in life.
You are doing fine, just let him be, he’ll either grow out of it or not. If he doesn’t, find yourself a good PFLAG group and read up on gender identity. Take lots of pictures!
eta
BTW, this is my teen who is heterosexual, my other teen is bisexual and never ever played “girly” games.
There is no such thing as a “girl toy” or a “boy toy.” There are simply toys.
AFIC, there is also no such thing as “girl clothes” and “boy clothes.” If it’s ok for girls to wear pants, why is it not ok for boys to wear skirts?
Let the kid play with whatever toys he wants, wear whatever clothes he wants.
Being that he’s only 3 seems a little early to be worried about identification.
But I would still put a stop to it. Just because allowing him his behavior most of the time but before we go out the door to change into his own clothes…that would be confusing enough to him. Like he’s being ‘trained’ to hide something. So what I’m suggesting is to make it clear to him he has his own toys and own clothes and to quit borrowing his sister’s stuff.