I think it was because he couldn't fight Sirius. My impression of the scene was that he was trying to run away and Sirius chased. Peter was cornered and actually came up with the idea on the spot - he had his wand behind him, cried out that Sirius killed James and Lily and blew up the street behind him to make it look as though Sirius had done the deed. That way, he could hide from the Death Eaters and have everyone think he was a hero at the same time.