Not only could devils have sex and children, they did so all the freaking time. What can I say, they were horny (rimshot). The same asceticism that turned angels into beings incapable of sex hypersexualized the devils and demons. Copulation with devils and demons became one of the favorite methods of denouncing anyone different.
It’s worth pointing out that the Maleus Maleficarum that how-to manual on dealing with witches, was published in 1487, just two years after William Caxton published Mallory’s Le Morte D’Artur. This isn’t to say that one affected the other, but that these kinds of thoughts were present all over Europe at the time. Part of the Maleus included the idea that witches would have some kind of sexual relation with the devil (the actual devil or some kind of demon) in order to gain power.
The Maleus also includes a detailed section regarding incubi and succubi, and the offspring of such unions called a cambion. It doesn’t appear that Merlin had any physical deformity that is most commonly associated with cambions, but his supernatural powers, much like those that a witch would have, would be derived from the circumstances of his birth.
So, with angels plain incapable of sex, and devils really getting it on, the only way for Merlin to have some kind of special powers is for him to be the child of one. It’s worth pointing out the giant flaw in thinking when it comes to the medieval mind. Everything is fate. I’ll dig into this more next week.