my guess is he saw something on TV that scared him. IT might even have been a silly advertisement. Talk about this, & his night mares, what is he seeing. My son had fears of "heaven" & aliens still freak him out at 15.
As for the potty training, the difference between a threat (punishment like a spanking) and a consequence for choice. (life is full of them. You don't show up for work, you get fired.)
Give him the choice. Under pants or the potty. If he too afraid to use the potty, then he can choose the diaper. One or the other. NO ANGER FROM YOU, just a choice. "We can start the day in underwear, but the first time you go poopy in your pants, "you are making the choice for a diaper." Honor his fears, he doesn't have to use the toilet, but he CANNOT use underwear, until he over comes his fear of the toilet.
my son got the opportunity to visit a preschool with a friend, about 3.5. He came home & told me he was potty trained.
That day he made a choice, & had no accidents after that.
You mentioned that there is a younger child. He may not want to leave childhood just yet, he may still want to be your baby too. Allow him to choose to go back to diapers, & wait. He's not to old to still be in diapers, & they are a lot easier to clean up than clothing.
A.