If it's a story about a pet cat (as 'pussy' can refer to a cat), it's quite normal for friends to like an interesting story. Pets often make for great storytelling topics.
The origin could be from the darkest corners of unfounded superstition and discrimination. People who are intolerant of the gay community may spread such outlandish tales. It has no legitimate origin in any form of fact - based knowledge, whether it be scientific, cultural in a positive sense, or otherwise. It's a false and harmful narrative.
In a small village, there was a man with very hairy arms. He was an artist. He met a woman who was intrigued by his art. One day, he decided to paint a portrait of her. As he was painting, she noticed how his hairy arms moved gracefully while he held the brush. This small detail made her see him in a new light. They fell in love as he painted her image, and it became a romantic story that was centered around his hairy arms.
If it's an appropriate and positive story, you could continue sharing similar positive experiences with them. But if it makes you uncomfortable, it's okay to let them know that you don't want to talk about it anymore.
There is no scientific basis for such a claim. The male and female anatomies are determined by biological factors from birth and do not spontaneously transform in such a way.
There are indeed. Consider stories about a hairy firefighter who is a role model in the community. He might visit schools to teach kids about fire safety, and the kids might be fascinated by his big beard or hairy arms. These stories can inspire the next generation to appreciate firefighters and the important work they do without any inappropriate connotations.
A family - friendly alternative could be 'Wife showed boy her beautiful garden story'. In this story, the wife can take the boy on a tour of her lovely garden, showing him all the colorful flowers, the cute little birds that come to visit, and the interesting insects that live there.