Just as a point of note - the way you are using the term 'special needs' as a description of a child is really offensive. A lot of kids do have some special needs at some point in their education - usually these are just met within the setting, and are not enough to categories them as 'Special Needs' in the manner that you are using the words (as if it was the worst possible thing in the world ever and somehow marginalized the child in some way).
All kids are different. Some need some sort of extra help at school or nursery. They are all perfectly normal kids, in a perfectly normal place.
Even if your child does need some additional help in nursery (whether because he is extremely shy in this setting, or selectively mute) it really doesn't warrant the level of fear and horror you are displaying, nor does it label him 'Special Needs' with the tone of voice you are using.
Be pleased that nursery have nursery have flagged that there is a problem (there is a problem - possibly just in this setting- the area Inc O doesn't get called in to assessments otherwise) and that they are being proactive - this is really very good. Excellent in fact. And highly unusual.
Your concern should be that the nursery SENCo did not discuss her concerns and plans with you in advance of the Area IncO visit, that is all.
Less hysteria about Special Needs on your part, and more communication between you and nursery, and all will be well. I am wondering though, if you have misunderstood the nursery staff on some occasion - you say you have discussed his behaviours at home with them - I am wondering if at some point they have been discussing his lack of interaction at nursery, and their concerns, and you have not realised that it was a more formal conversation? Perhaps at some point the nursery manager or keyworker (also filling the SENCo role) has mentioned a visiting person? It may also have been that the Area IncO was there to observe a different child, and it was a more general discussion that led to your child also being observed. In which case, a bit naughty, and they should have let you know straight away, but it may have been entirely opportunistic. An example of their great attitude towards getting support in place where it is needed, though, even if a bad example of their parent communication.
You'll be pleased to know that my 'Special Needs' kid is entirely normal, has been observed many times by the Area IncO, and has entirely survived. 
Just talk to the nursery and ask for clarification. There is really no need to have spent the weekend in purgatory. Even if he does need some additional support at school, he is exactly the same kid that tootled in to nursery on Friday morning. He hasn't developed two heads just because someone did an observation report.