My instinct is the same, get him out of that enviroment and into another more suitable one.
To teach him how to 'stand up for himself' you need to spend time with him in the same kind of enviroment, so that your on hand to help him react in a more confident way because as you say he's too young yet to grasp it all just from chatting to him about it. Perhaps some role play with his teddies would help build his confidence up too.

But really, think about finding somewhere new for him to go to because he's so little to have his confidence knocked like that...and they do say what they learn in the first 3 years of life is what stays with them for the rest of it.

Is the teacher aware of this? If so, you should discuss with the head teach or management why the teacher allows this to happen. Complain to the school board.