I am confused if this professor will fund me or not, I feel it is rude to ask directly
What does he mean by "host"?  


Host means (at a minimum) that you can work in the lab - the professor will provide space for you during the internship.


  Does it mean funding?


It is ambiguous. This partially depends on what you asked for in your original letter asking for an internship.


  How do I go on about asking him politely about it?


Being hired is still contingent on a good recommendation letter from Prof XXXX. Assuming you can wait for that letter, I would ask about the terms of the internship after the letter is delivered when you confirm that the professor has received it and is still interested in hiring you for the internship. You still need to confirm that you are interested in working on the topic in the provided paper.

Asking about a list of different things can take off some of the stress around asking about funding directly. You can, for instance, ask about dates of employment, expected hours, whether there is a travel or housing allowance, and whether there is a stipend. You might also ask about whether you'd work with others in the lab and expectations for publishing.