David Bowie's response to the matter (as reported in US magazine in 1995) was succinct:

"About 15 or 16 years ago, I really got pretty tired of fending off questions about what I used to do with my [penis] in the early seventies. My suggestion for people with prurient interests is to go through the 30 or 40 bios on me and pick out the rumour of their choice."

Bowie's wife Angela DID find them asleep in bed together. And they were naked. But whether or not "anything" sexual happened has been both claimed and denied at various times by Angela herself.

There's a long, long series of versions of this Urban Legend at:
http://www.snopes.com/music/artists/bowie.htm