Perhaps this is true, but perhaps Mario just has a lot of weird dreams because his diet consists almost exclusively of mushrooms and brightly colored, flashing flowers.

In Super Mario Land (for Gameboy), the objective of the game is to rescue Princess Daisy. The game is divided into four worlds, and, after defeating the boss at the end of each world, Mario is reunited with the Princess. He runs up to her and several hearts float up.

Unfortunately, if this is one of the first three worlds of the game, the princess is actually a monster in disguise. It reveals its true form in a puff of smoke and then leaps off the screen.

If, however, you have completed the game, Mario and the princess walk off to the right, enter a rocket ship, (don't worry, it's not at all phallic) and fly through the sky as the credits display. I believe there are copious quantities of hearts displayed in this sequence, as well, although it's been a while.

Based on the evidence, I think we can conclude that Mario is not, in fact, gay. It is still unknown, however, exactly what is in the mushrooms.
Oops. Land, not world. Silly me. Thanks, yerricide.