I don't normally say this but I would leave.  That behavior seems super inappropriate to me.  I would feel the exact same way.  I think you need a new counselor also.  One that is more experienced in blended families (if you do go back to counseling).  

I wasn't trying to say he is a pedophile but if he isn't doing anything to show his daughter what is appropriate and doesn't think their is a problem with the way things are I would personally leave.  I understand wanting to work things out and having other children involved but that girl needs to figure out some boundaries and he needs to be on board.  He is treating her more like a lover than you and that is a problem!  

Find a new counselor for sure!

1. Find a counselor who deals in blended family situations and understands the dynamic of mini wife sydrome

2. My DH used to let Spawn lay all over him to the point of looking wrong. One time they were on the floor and the way it looked was just gross, my parents came over for dinner and saw this and my mom with out thought blurted out "That's looks so wrong why would you allow her to sit on you like that?"

DH sat up and had Spawn move and later chewed me out for my mom's comment. I told him it wasn't anything that I wasn't thinking myself, after that DH started being more careful with how he let Spawn touch him.

3. I'm sorry but no man doesn't not know when his crotch is being touched or there is an object near it! They protect that thing like it's made of gold.

Like most problems with skids on this board this issue originated with your husband. He's the one who turned SD into his mini-wife when he and BM split, someone had to fill the void of female companionship and affection, and SD did.  The counselor is right that DH is the adult and needs to be the one to teach SD what kind of affection is appropriate. The problem is that your DH has boundary issues and does not know how to treat his own daughter like a child. It sounds like he is unwilling to give up the "special" relationship that he and SD have developed.  I don't know what the answer to this issue is but the cause of it is DH.  

I think you would save more than daycare expenses if you got rid of this anchor and his little love bird.  Something isn't right in his mind if he thinks that this behavior is okay and you are the problem.

His disrespect about this old lover is just another reason to RUN!!!!

I hope you enjoy the day with your children so much that you go home and pack his stuff along with his little lover's stuff and tell them to go find their own love nest to be grossly inappropriate with one another in!!!!

She's 11, pre-pubescent. SD either learns NOW or the behavior will continue to cross the line and escalate. Accept no excuses from DH. It's up to him to say, "no" and teach what is appropriate. Sounds to me like DH may have his own boundary and guilt issues.  At 11, she may be feeling the confusing pangs of oncoming sexual maturity and dad should never be the object of these feelings. The intention and message should be clear - do not in any way behave, touch or inappropriately display behavior that is overtly "sexual" because it smacks of incest!  Don't be afraid to say the "I" word. If DH cannot create solid, healthy, physical boundaries, he needs a good swift kick in the behavioral balls. 

I witnessed my SD24 sit on DH's lap and grind while she grunted, "oh ow I've got a knot in my back...can you rub it out?" I calmly observed this while bile rose in my stomach and my gut twisted. DH's face was in shock. He was clearly uncomfortable, but she took him off guard. It only lasted for a short time before he guided her off his lap and made an excuse to have me help her as I am trained in therapy.  We should have called her out when it happened, but we were both clouded and taken off guard. 

It took me a couple of days to say what needed to be spoken aloud to DH. During the days I was forming my thoughts, a lot of questions ran through my mind and I felt repulsion towards DH. We had already been dealing with emotional enmeshment issues, but this sexual provocation was entirely new and to me it felt like the energy of "an affair." The bottom line is her behavior was outright incestous and made us extremely uncomfortable. I was looking directly into his eyes when this happened and it disgusted him as much as me.  

Be extremely honest about your feelings to DH particularly when it comes to these "physical" matters.  There are ways of showing affection without crossing the line. Today she is 11...they grow up fast.  I refrained from saying anything about my SD's behavior for nearly 4 years for fear of sounding like I was targetting his princess.  SD's behavior became more manipulative and brazen because of my silence. She mistook our easy-going, pacifist natures for ignorance and gullability and that she would never lose her place on the princess pedestal.  Unfortunately for SD, truth always rises.  Game over.

Here's a thought...

Given that he says their behaviour is normal, ask him how he'll feel the first time he sees her lying on top of a boy. Well, why shouldn't she? If it's OK with daddy, why would it be wrong with any other male?