awww.. I can't imagine how hard this is for you J.. It hurts so incredibly much to see your kid hurting. I have a couple pieces of advice:
First off-I wouldn't make an issue about him asking the teacher to read a different book. My son is also in second grade and I know that he wouldn't do that either and he is pretty outgoing. They have a strong sense of "rules" at that age which are black and white. In their mind that would be bucking authority.
Second-Talk to his teacher ASAP about his fear of a yellow card. She needs to discuss her process with him and why or why not a child will receive one and then she needs to reassure him that he will most likely never get one.
Third-get him involved with Scouts. My son is in this program and I have seen first hand how it brings the quieter kids out. Speak with the leader beforehand about your son's shyness so they realize they need to make and extra effort to inlcude him.
Fourth-Talk with your schools guidance counselor. Ours does lunchs with groups of kids in her office each day. They are guided as kind of an ice-breaker so kids can get to know eachother or conflicts can be resolved. Chances are good that yours can find something similiar to do.
Fifth-don't belittle him about this in ANY WAY. Really watch what you say because you may not be realizing that you are doing it. He needs to feel great about himself at home. Also-you may make things worse by making it a huge deal.
And finally I would really try to evaluate what has caused this backslide in his socialability. He may not be able to or want to explain to you what he is feeling in his new class. Are there bullies? Sometimes bulllying can be very subtle. ARe the kids already friends and in a clique that excludes others? These are just a few possible reasons. I would also address this with his teacher. Also-and this is what I do with my son-take time to talk with him one on one. Every night before bed I lie down next to him and we have our "talk time". Here he tells me everything that is going on. Before this he would never tell me anything.... Now he tells me everything because I think it is such a relaxed environment that he feels totally safe and realizes that I am not there to judge or to yell...just to listen.
Good luck to you-be sure to let us know how it works out.