This is really common. According to human growth and development, kids 0-2 get pleasure from the mouth, and ages 2-4 or five get it from, you guessed it, their butt. Caught my 3 yr old son doing this with the antannae to my shower radio(never used that again) Anyway, I just told him that's it's ok to touch himself there, if it feels good, but to do that when he's alone, and not to use my shower radio antannae because "if it gets stuck up there or breaks off, Mommy's gonna have to explain to all the hospital people how it got up there"
I've read some posts about medication, molestation and the such, unless you really think something bad happened, I wouldn't worry too much. I live 4 hours away from any family and only trust my kids with my parent's or my in-laws, so basically, my son's never with anyone but me and my husband, and my son's so clingy he's never alone. Seriously, look up human growth and development, kids don't discover their genitals as a source of gratification until a little later, that's why toddlers sometimes hold their poop-it feels good, I guess. I asked my son why he does that and he said "for fun-it feels good" I'm going to be crazy in 13 years or so!