He is obviously a very bright child, and it sounds as though, apart from the mixed messages regarding reading, the school are differentiating pretty well (eg sending him to the class above for some sessions etc). I also have an advanced reader, and while DD’s school have never held her back in terms of levels, they have paid very little attention to her reading in the three years she’s been at school (because she is not a ‘problem’). For all we know she is developing bad habits (obviously she reads out loud to us at home and we discuss the meaning of words, inference etc). However, I recognise that this is not high priority for the school, so I don’t bother them about it.
Regarding lack of perseverance, I think this is not uncommon with bright children / high early achievers. My DD’s excellent Reception teacher spotted within weeks of DD starting school that my DD, while clearly bright/ahead academically, was quick to back away if she didn’t immediately understand something. We and the school have watched out for this since, and are quick to praise effort and reassure her if she does make an occasional mistake. It’s an ongoing challenge!
I think the main problem is that your DS’s obsession with reading levels and the challenge that they pose is unhealthy. You seem to think that if the school relents on this it will make him happy. I think, instead, you have to explain to him, as many times as it takes for him to understand, that reading is not a competition, and that sometimes we just have to do what we’re told. If that means reading a couple of straightforward books per week to satisfy the teacher, so be it. I know you’re battling with his mental health and his obsessive competitiveness. He needs to learn that he can’t have everything his own way, and that this stuff doesn’t matter too much. This might be a significant challenge for him, but it’s so important, as he will encounter lots of ‘restrictions’ in life and he needs to be able to handle them. Good luck!