I can see where he's coming from, its a very male way of thinking (yea yea I know thats a sweeping generalisation), I do understand it but I find it unattractive too, and I'd want no part in it myself. This idea that he wants nothing to do with 'her' or 'her children' is quite childish don't you think?
However you're stuck in the middle and its unkind of him to put you there.
I think I'd put the cheques in an envelope and hand it to your son saying ' this is from your father for Christmas. Your son will (with luck) spend his cheque on the family, and put the other in his elder son's savings account for later years. No need to mention the cruelty of missing out the step children.
Depending on your relationship with the grandad, I'd say in future he can hand over the money himself or post it, but refuse to be his messenger again, its unfair to expect you to take 'sides' where children are concerned.
I don't suppose his step children want his bl**ding money anyway.