I asked the question because the response I would have made (not knowing anything about the nursery's policies), would be to say
'Oh, do you want to sit on my knee? How lovely! Quick, let's pull up your trousers and then sit on my knee and we'll both listen to the story'
Yes, a child going to a stranger for comfort is a concern, but in this situation, it sounds as if all the adults are strangers.
Of course, it may be that the nursery has policies about physical contact, or responding to 'inappropriate' behaviour, which is presumably why the nursery nurse responded in this way.
I understand why, in this day and age, staff might not feel comfortable with a semi naked child sitting on their knee.
But those policies may need to be revisited in this context, because it sounds as if this child does need someone to go to for comfort and safety. Hopefully the psych can advise, and help with policies and boundaries that can make the child and the staff feel safe.
One of the best bits of advice I read was to never say 'no'. Before anyone reacts in horror, that does not mean having no boundaries! But stating the context in which you can agree, eg
'Mum, can I have some ice cream?'
'Yes, after supper'
After school demand 'I want to go swimming!'
'We will go swimming on Saturday after breakfast'
Tantrum ensues
'I WANT TO SWIM NOW!'
'We are going to go swimming, on Saturday after breakfast'
Behaviour saying 'I want physical contact'
Verbal direction 'Let's pull up your trousers and you can sit on my lap'