Think your telling him that he has, in your opinion, deep psychological issues and needs help would only be seen by him as an attack and make things worse.

You are his boss...tell him he has a choice. He can reign in his attitude and keep his job, or he can get fired and go job hunting.
-If he becomes verbally hostile during this, send his butt out of there immediately.
-If he ever threatens harm to you, call the police.

There is no reason for you to quit your job, there is reason to "grab this guy by the ear" and lay down the law to him. He is going to push limits as long as he is allowed to. Chances are good that he has been down this road before and lost previous jobs because of it.