He knew of the pregnancy and he also knew regardless of what the other woman told him that it could be his, lack of protection and the dates must have made him realise. He can't be that stupid. But he took the easy route and believed her because it's the most convenient truth for him.
The children can't have a sibling relationship with one not having any involvement with her father- it's cruel, a massive head fuck to her when she's older and is just so unethical.
In this scenario he needs to step up and either financially support his child or/and try to come to a parenting agreement- hopefully through mediation if not court. Both children deserve a father, a good one and if he's good enough for one he's good enough for the other. If she won't accept financial support I would expect him to open up a savings account and put the money in their for when she's older.
My daughter doesn't see her dad, she doesn't even know he exists- he was an extremely violent and dangerous individual. It kills me every single day that she doesn't have a dad she deserves. My dad was incredible I couldn't imagine a life without him. My husband has completely stepped up and filled the void- but because of my stupid errors of judgement she is not around her bio dad.
Your scenario is politics that's all it is- it's stupid and you all should be adult enough to overcome these barriers for the children involved.
Your husband needs to stop centring his universe around you and his son and open it up to his daughter. His fear you would leave hasn't led to fruition so he needs to step up.
The other mother needs to be communicated with, her choices are going to impact her daughter- she needs to stop being so selfish and see that.
As for you, you need to deal with his betrayal properly. By excusing it and blaming yourself means that in future it will be something that could explode in you- if you don't address it now, it will come to haunt you. And you can address it with forgiveness but you are skipping so many vital steps- he needs to acknowledge and you need to acknowledge he slept with someone else without protection on a number of occasions whilst he was with you- he needs to own this, and he needs to act on it by being a responsible husband and parent to both of his children.
Break the cycle before it has a chance to screw up two innocent lives.