I find this thread really chilling too.
The majority agree that something may be amiss here, you wouldn't have come here if you didn't feel this too. 
What stands out to me:
I would never dream of asking my DH if he feels uncomfortable hugging my developing 10 year old, why would that thought even cross your mind? alarm bells ringing
The fact that you check to make sure he is not abusing her.
n most families that would be a given that the father/step- father who you are with is not. alarm bells
The connection to your DD through a past life (I know he says she was his sister) but really does he believe she was something else, I find this quite sickening/weird. Is he grooming her? Does he have MH issues? Does he say this in front of her? alarm bells
Lying with her while she goes to sleep, well its a bit uneccessary even if it is innoccent which I am not saying it is. My 10 year old says good night and off she goes, occassionally she will get in bed if she has had a bed dream or if DH away (shes too big otherwise)
The front seat thing, why oh why are you being pushed out, grooming? What does your 9 year old think? My 7 year old would want a turn. 
Cutting your converstion short to talk to DD, weird.
In any case it is up to you to protect your children and it is not your DDs fault.