Sounds more like a behavioral problem. Since the cat was born with the condition (as I read it) and he is 7 years old, its hard for me to see this as a phantom limb thing. And the timing between this new behavior and your niece getting sick tells me that he is doing this for attention and reflecting the nervousness within the family.

Take the 7 yr old kitty to a vet, preferably a vet with more behavioral experience. I just think he needs a playmate, some active toys wih catnip.

The self inflicted injury may be itching so he might be continuing with the gnawing so a trip to the vet is probably worth while. And to kep him from chewing after he heals, you may need to observe his behavior and have a consultation with animal behaviorist.

Personally, I think someon in the family needs to play with him or get him a another kitty playmate. Even though he is 7 years old, he may do better with a young male cat. Don't ask why but we have had more problems with girl kitties when we foster. Neutered males were the easiest in terms getting along wih other cats.

smilingcat