Personally, I'd take him out. I took my child out of an extremely oversubscribed (and expensive (we lost the deposit and the next term's fees!)) nursery last year after she didn't settle in the first term. There had been tears most mornings and eventually I just thought, 'what on earth am I doing this for'? It was making her miserable, me miserable, and her little brother miserable and I didn't need the childcare. Also, I thought, institutionalisation starts far to early anyway (even in Montessori). We all think we should send them to nursery because everyone else does! In plenty of other countries though children spend their first five years playing on the kitchen floor, not even attending classes (shock horror).
So I took her out and didn't really mention it again until just before she started a new setting two weeks ago. I very occasionally mentioned the new pre school if we walked past but that was it. Well, she loves it. She's settled straight away and for us this was obviously the right path.
I also don't think taking him out now will make him think he can get out of school by acting up. I worried about this and decided that the situation couldn't really get much worse anyway and it could get a lot better. I just said that that school was over and that was that.
Also, there are children who go straight to school from home having never set foot in a preschool so I wouldn't be too concerned about that side of things.
Do you know which school he'll be going to yet? I had this year's school lined up which helped.
It's such a hard choice but I knew straight away I'd made the right decision even though everyone treated me as though I was totally mad! At the very least I had an extra, fun, adventure packed year at home with my daughter. Good luck either way!