T.S.
Hi L.,
I don't think any good can come out of making a big deal about this, or trying to restrict his dress-up! There are two possible scenarios here and neither one will be helped by flipping out over his choice of costume.
If this is "just a phase" as you put it, making a big deal will only make him anxious, and guilty and feel uncomfortable with is ability to make good choices (isn't that what free-play is about... getting to make choices).
If it is not a phase and he is truly wishing to be a girl, taking the dress away won't change that but will certainly make him feel like his parents don't understand or care about his feelings.
Just let him be who he is, dresses, trucks, dirt and all. He'll either grow out of it or he won't, the important thing is that he stay confident and secure in his relationship wiht his parents.
HTH,
T.