Clean it with some hydrogen peroxide and then take him to see your vet. It could be any number of things. I just had my dog in this morning for something similar. She said that it looks like he may have gotten bit by something and it had an abcess on it so she gave him some antibiotic pills and then some antibiotic cream to put on it. I have to take him back in about a week for a recheck.
Make sure your dog doesn't continue to lick at it in the meantime because he could infect it and if you have to get one of those medical collars to put around his neck to keep him from licking it, that might be a good idea. I found one at Petsmart for $10.00.
In addition, until you can get him in to see your vet, it might be a good idea to keep him away from any other pets as he could spread whatever he has onto them.
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