I will not allow anything physical and when something like hitting or pulling comes up I will intervene and give the kids words to use and let them know their hands are not the way to solve their problem.
Most of my problems are kids taking toys from one another and someone comes to tell, so the first thing I say is "did you ask little johnny to give you your toy back?" They usually say no and go and ask and the toy comes back.
I really believe in teaching kids to problem solve. If johnny takes your toy, ask him to give it back. If you still can't solve the problem then ask an adult for help.
I discourage hugs as well. Toddlers are taught by parents to say sorry and give hugs. But hugs aren't always welcome. As nice as a hug is they need to learn that someone's space is their own. You can ask if you can give them a hug... but we don't just walk up and hug someone.
I think it's hard for a toddler to understand the difference between a hug and pulling their friend by their shirt to come and play. Both are good intentions in their mind.