I've stressed to the team the benefits of self-organizing teams and team empowerment.

Well, they certainly took that part to heart.

It seems clear that you're in very emotional situation right now. Apparently, your team has some major issues with the current relationship between you and them. It was probably a good thing you weren't at the retrospective, because that's usually the reason people are suddenly willing to speak out about what's really bothering them. If they're willing to do it around a Scrum Master that they've only been working with for a few weeks then either they already trust the guy or they're so annoyed that they don't really care about the consequences.

Either way; this isn't a new problem that suddenly appeared when you switched to Scrum or hired a new person. This is a problem that has been festering unseen for a long time. It's often stated that working Agile doesn't so much create new problems, as make the already existing ones extremely obvious. This is likely a case of that.

That said; your Scrum Master dropped the ball, hard. It's his job to help the team grow towards being self-organizing, sure. But this isn't the right way. For one, he can't actually fire you, and just telling you "this is what the team wants" is completely nonconstructive. I'm not sure what he thinks is going to be result of this, but it can't very well be what the team thinks it is.

Also, removing people is the hardest choice that a team (or Scrum-Master) can make and should never be taken lightly and without talking (repeatedly) with those involved. You can't just go out and remove someone who has no idea that anyone is having an issue with them. If nothing else, it's going to leave everyone scared as hell that if they miss a retrospective, they might suddenly return to work to find they've been booted from the team. It's going to create an atmosphere of fear, not trust. An atmosphere of trust and openness is what you want when working Agile.

So with your Scrum Master failing to work on an open atmosphere (at least outside the team; he seems to have gotten people to open up quite a bit internally) and not looking for a constructive solution, it seems to fall upon you to do it.

At this point, I don't think anything authority-based is going to be helpful. Scrum and Agile are about empowering people to do their own thing, and asserting your authority at this point is probably going to end up with the entire team being fired. The team has already stated that they're at the point where they want people gone, so while they might have gotten the person wrong, going head-to-head with them will probably end with at least a few people leaving. (And remember the most important rule about leaving: the most valuable people will be the first to go.)

So if you really want to do Scrum with this team, this is where you have to accept their ability to decide how they want to work and have an open discussion about how they want to organize their team. They can't fire you, but they made it abundantly clear that what you're doing now isn't working for them. You need to have a talk about what your role is going to be in the future, what they need from you, what you need from you, and how that's all going to be arranged. Keep in mind that they get to decide how they work, but ultimately there is still a product that needs to be delivered; they will be judged on the quality of what they deliver. And if there are organizational things that you need from them, they'll have to do those things as well. (That said; work with them on the form of those things, and make sure they're really required before enforcing them).

Make sure that in that meeting, you don't approach things from your authority; the whole idea is to get everyone on the same level. You are colleagues and individuals who all have a job to do, all want to do a good job, and all have to work together on a day-to-day basis. Being an authoritarian usually just makes people antagonistic towards one another, which isn't productive. So try to be vulnerable here, and be willing to admit the things you did wrong. You need to figure out how to go from here as human beings.

It sounds like your team hit the Storming Phase of their development as a team, and they hit it hard. Now it's up to the team (and I'm including you in it, at least for now) to figure out how to go from there. Be warned; not all teams get out of this phase and I can't promise that this approach is going to fix the problem. I can guarantee that it won't be worse than quitting or firing everyone, though.

And make sure to have a talk with the Scrum Master separately. I'm not sure what caused him to open with such an nonconstructive first message, but he needs to work on his communication and problem solving skills.

Good luck with your situation. You certainly live in interesting times; make the best of them and learn what you can from this.

(I'm also assuming here that the Scrum Master won't get the whole team to revolt against you without some serious underlying issues. If he can and he's angling for your job, he's a master-manipulator. As soon as you reach the point where you think that's what's going on, you need get rid of the guy asap. That's probably the one case where I'd consider just using your authority as the person who hired him and fire the guy.)