Sorry, everyone's childhoods, the classic Muppet song isn't as innocent as you might've thought. It's one of the best known songs to come out of the Muppets, and it's been re-played and covered a lot of times. However, it wasn't an original composition for Jim Henson's creation, but rather for a 1968 soft-core Italian porn film.
The movie is called "Sweden: Heaven and Hell," and the song is played for a scene in which some Swedish girls go spend some time in a sauna. Check out the clip from the movie below (no worries, it's not NSFW).