I worked with disabled kids, and one of the girls had a "problem" in that she touched herself almost constantly. Her mom talked to us staff the first day about it. "Tell her it's okay because it feels nice, but it's private and not okay in class." We had a little bed thing in our (rather large) bathroom, and we let her go in there once a day for some private time. It was no different than the kid who loved to jump wildly - it was okay, but not always okay right then; he got daily time on the trampoline to have fun in an appropriate environment to it.

I really think something similar should be allowed for all kids. It's okay, but it's not a public activity (rather like more-people sex).