My Boy Can play with dolls and I won't discourage it. To some peoples dismay, I refuse to enforce on to my son that he can't play with dolls.
How does that impact on his masculinity? I believe it will make him develop skills in caring and nurturing of other people. It will help him discover empathy and the importance of responsibility for another person. It will show him what it is to feed, change and cuddle another person. His fine motor skills and cognitive development will be explored.
It also allows him a safe space to discover communication and complexity of relationships. Where he can play and make mistakes while he establishes scenarios that happen around him in the real world. It helps him to discover what it takes to have responsibility in his own actions with another person-in this case a doll. If he doesn't feed it, how will his doll feel? If he drops the doll what does the doll feel? But also how does he feel? What if he is the doctor and has a patient, what words will he need to use with his patient? What equipment will he need for the doll to get better? ALL of this is important learning tools and helps him to develop skills needed at this young age.
It most certainly does not determine his sexuality. It most certainly does not make him soft. It most certainly does not hinder his masculinity. It will strengthen him to be a good friend, husband and father that I'd hope my son will become.