One of my nieces would not let her grandfather hug her and she gave him a wide berth generally. He said that when she was very little he was holding her when he slipped and fell. He kept her from getting hurt, but he thinks she got frightened. From that time on, she didn't want him to touch her.
Children can make associations between things that are not related at all and begin to have phobias. He may been upset that his sister was sick and thought about causes...remembered you touching her...and decided that there was a cause and effect relationship there. This kind of thinking is typical in someone with OCD, the difference between adults and children is that children do not know the fear is irrational so they don't try to hide their compulsive behaviors. It sounds like OCD or phobia, both are a form of anxiety and treatment is possible. Find help, resources and info here: and help find counseling for him. If it is anxiety, it will get worse over time and not go away on its own.
This may not be about germs. He may be taking against you for some reason that no one understands. Sit back and be patient. Don't encourage his affection or attention. That might only reinforce his behavior. Please let us know what happens.
Aww, try not to take it personal...
You mentioned his little sister had surgery. Did your grandson visit a hospital and was instructed not to touch anything or anybody there? It might be a phase when his mind is analyzing the world of germs, sickness, old age and so on. I am sure it will pass.
I had once irritated the relationship between my son, his Grandma and the other grandchildren by asking him not to share drinks from the same bottle. They used to come down with strep throat too many times and I thought it would be a simple step to avoid the vicious cycle, not aware it would also upset Grandma.
Maybe someone can take it a step further with your grandson - there are lots of great books out there - to show which germs are transmitted in which way and how normal interaction usually has no issues, unless we are talking about Norovirus or Mumps and the like.
I'm so sorry. This has to be difficult for everyone involved. It sounds very much like your grandson might be dealing with some ocd (obsessive-compulsive disorder). Fear of germs, and behaviors such as his, are pretty common in ocd. The way to deal with it isn't going to be by forcing him to hug or touch anything, but by figuring out what the fear is and confronting that fear. The rest will fall in line once the anxiety at the root of this is dealt with. I wish I could tell you he would grow out of this, but I think someone really needs to talk to the pediatrician about it. If it is ocd, it can become a monster for your grandson and everyone in his life. There are really effective treatments that everyone at home (and you) can do to help him, with the guidance of a doctor who understands. Good luck.