My ds sounds exactly the same as yours. He likes the puppy and has held it and played with it, since it was small (we are very fortunate we have been able to do this because it is a friend's litter who is very understanding of the problem). We went to see the puppies yesterday and now they are getting bigger and have teeth his is a little more nervous. However, after half an hour with them he starts to get used to it. He is still, interestingly, terrified of the mother.
He will do anything to avoid contact with a dog - before now I have left him sitting in the car for over an hour while visiting someone with a dog. He will also not visit any pet shops with us to buy things for the puppy incase a dog is in the shop.
My theory is that with the puppy around him all the time, he will have no option than to get used to it. I hope it works and that they will become good friends! The gamble is whether he will just get used to our dog and still be terrified of all others, but I can't believe that this will be the case.
At one point his fear (and yes I would definitely call it a phobia) was transferred onto cats and I thought about getting any sort of animal that would help him learn how animals behave. However, with cats and rabbits etc, it is very easy to ignore them or shut them in their cages.
This is a big thing for us to do, because neither my husband or I have had a dog before, but we really have felt desperate for a solution before he become agrophobic (sp?) and won't leave the house at all.
I will certainly let you know how we get on, if you would be interested to know.