What you heard is apparently an updating of a fifteen-hundred-year-old story which exists in western European literature as a miracle of the Virgin, and which exists in the F.J. Child collection as 'Sir Hugh, or The Jew's Daughter' (c.1250). Geoffrey Chaucer included this legend as one of The Canterbury Tales. It does, indeed, refer to the anti-semitic belief that Jews practiced ritual murder of Christian children. In some versions the child's body is thrown into a well; in others, into a jakes (privy) pit. In all versions, Son Hugh aids the folks searching for his body by singing his favorite hymn to the Virgin. I grew up hearing the ballad in its traditional form in the Cumberland Mountains, but I'm surprised to learn that it has been bluegrassed.