This is a matter that really calls for tact.
I too feel that it is really a matter for your daughter and her husband to decide,
That said, it is unfortunate that she has suggested Uncle and your husband is hurt by this.
You didn't actually mention a son-in-law, but I assume there is one, so there are two biological grandfathers involved here.
They obviously cannot all be called the same, can they?
So if, as I assume, Granddad and Grandpa are already taken, you and your husband need to think outside the box.
Could you come up with something he would be happier with than "uncle" and then could one of you very diplomatically mention to your daughter that he would be happier if the little one came to know him by that name?
English is restricted in not making a distinction between mother's father or mother and father's, so there is less choice.
If you don't have any other linguistic connections, which would make it appropriate for him to be Opa or Abuelo or some such title, then perhaps Gramps (which I personally don't care for, as I feel it is too close to grumps and grumpy) or something like Dada or Papa or Papi with his given name after it, might provide a compromise you all can live with.
But please, do not spoil your relationship to your daughter and grandchild by being too insistant here. It is far better to swallow your disappointment than to risk estrangement.