It sounds like he is ready to use the potty, can hold and release as needed, but maybe it was a little too much pressure/excitement for him. Some kids do better without all the fanfare. I think it sounds like he doesn't want to go in the diaper because he knows you really want him to use the potty, but he's a little anxious about that, too. Personally, I wouldn't go backwards so I'd scale back on the pressure and put the potty in front of the TV or do some other relaxing activity and have him just sit there. No pressure to go right away and let him relax and take his time. Spending hours in the bathroom doesn't sound like much fun for anyone. I'd give him your planned reward (maybe 1 M&M) just for sitting on the potty and even trying, not just for "success." I'd give him a diaper at night and maybe during nap time if it makes you all feel better but I wouldn't give up entirely. I'd be calm and confident. "I know you can do it, Ds, and it may take a few days to learn but that's okay."
Ds1 (2006). Ds2 (2010). Ds3 (2012).