(i'm using option 1, "i'll beat thee, but i would infect my hands"
Explanation:
in modern tongue, this insult roughly means that the person being spoken to is so disgusting that he/she is not even worth beating up because you would get sick from touching him/her. when timon says this to apemantus, they are in a nasty brawl. although possibly seen as medieval, this insult could easily be used in modern arguments given shakespeare's witful wordplay.
