Wow... an excellent question, but such a tragedy for your friend! I feel for him. But to your question: I am guessing that your friend tends to lean toward general anxiety in the first place, which set him up for the current malady. What your friend has developed is called a specific phobia, and it is really causing problems for him. Not only is it compromising his adjustment and happiness, but as you insightfully asked, the prostate needs to be regularly emptied to avoid a build up of bacteria - ultimately, this can lead to prostate cancer, but it can also lead to less serious but quite uncomfortable diseases like prostetitis.
As for treatment, there are several different techniques that can be employed, and I am quite confident that though a not-so-terribly-long experience in therapy, he can function normally. EMDR is one technique that has been shown to be effective in the treatment of phobias and traumas (such as the one you alluded to). Also effective is a technique called systematic desensitization - a big ugly word, but a structured methodology for resolving specific phobias. The success rate for both of these techniques is high, so his prognosis would be good.
In any event, I would urge your friend to seek a therapist who can work one of these techniques with him. He may also benefit from medication that could take the edge off of his anxiety in general, thereby freeing him up to respond well to the therapy. There is no reason to continue along this sexual path - sexual expression is such a vital component to relationships and happiness!
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