Hi M.,
I was wondering: does your son ever have adults who do this for him when teaching "gentle" touch? This sounds a little like how some teachers/parents 'do' the whole gentle-touch thing, but then done more aggressively.
That said, think back and make sure that none of the adults in your son's life are in the habit of taking his hand in that way. If adults are doing this, then we have to re-think how he's redirected and handled. I'm not saying that this is happening, I am suggesting that if this *is* happening, then you want to be aware of it. As parents and adults, we are modeling for kids all the time.
If that's not the case, then do as others have suggested: address it in the moment, as often as possible. Be clear about where on the body touch is appropriate and be specific as to what is not okay. You can do some role playing or use puppets or animals to demonstrate exactly where (some kids really get confused by the names of body parts, so show what's okay).
When he's been corrected and does the hand grabbing again, have him take small break in a boring place. Finding a chair nearby but out of the action can be just fine. A low-key "I need you to sit here until you can be safe with your hands/keep your hands to yourself. Come check in with me when you are ready" will work well. Actively ignore (which means make sure he's sitting there, but don't engage, and do listen if he wants to problem-solve) him until he's ready to return. The idea is for him to take a break and get his mind focused on doing better the next time. When he's ready to return to playing with other kids, a simple reminder "hands to ourselves" ( positive affirmation of the behavior we want to see) is all that you do. Repeat as necessary.
You may also want to consider that sometimes, leaving the playtime will be the best option. I don't know to what degree you are concerned about your son, but I will say that leaving right away *does* get their attention. It is a short-term high-stress moment, one that he'll remember. I would say especially regarding babies. They are so little and he just doesn't know *why* he needs to keep his hands to himself. You are going to have to help him a lot with this.
And when you are out with him at times he might do this, stay close. Look for those moments when he seems to be heading toward grabbing and use your body to get between he and the baby. "We just look at babies." For kids this age, babies are very similar to dolls-- they are often very passive, they don't talk, they don't 'do' too much from the perspective of a three year old. Dolls are also called 'baby', so that can be confusing for some kids. In my time working with kids, I have seen a lot of older siblings pack their younger sibs and babies around like dolls, so that's why I say this. Even very loving siblings are ungainly with their younger ones. Try to give some positive guidance proactively. He will really need it. At three, they really want to do what they want to do, and we have to do a lot of distraction and circumvention.