I’m not sure where that rumor came to be, but allow me to say this. If Prince Duncan the Small was a dwarf, I can almost guarantee we would have had that mentioned somewhere. Prince Duncan is known to have jousted at least once and participated with distinction as an officer in the Fourth Blackfyre Rebellion. I’d say that makes that theory incredibly unlikely.
If he was a dwarf, I would imagine a lot of Westerosi lords would quietly push for Aegon to set aside Duncan for Jaehaerys. Absent any other evidence to the contrary, I’d say Duncan didn’t wed Jenny of Oldstones for any other reason other than he loved her.
Thanks for the question, Anon.
SomethingLikeALawyer, Hand of the King
Also, we now have images of Duncan the Small from WOIAF. It was a very simple joke, folks. Dunk is huge, so Duncan is “Small.”