Speed sensor (G28) has exploded

I fitted a new speed sensor last year (Bosch part) and all was well until this morning, when I overtook a car and things went a bit lumpy. The EPC light came on, followed by the EML. I stupidly stopped the engine when I was dropping my wife off and it wouldn't start again. I had a code scanner with me, so I scanned the car and got 16706 - Engine Speed Sensor (G28): No Signal.
So I paid a silly price to get a new sensor from the local dealer so I could get the car running again today. It's spring here (Finland) and things are still a bit brisk, and 6 months of ice and snow are melting. So I had to do the work in a wet, icy car park, which wasn't ideal. And when I got the old sensor out, it seems to have exploded, or had the end ripped off!
I've fitted the new one, and now I hear a rhythmic rubbing sound, which gets worse/louder when I push the clutch in. I just drove it about a mile home and parked it on the driveway. I'm going to see a VAG specialist tomorrow for an opinion, but right now I'm imagining the worst. Is there something wrong with the gearbox, and it's going to take the end off another 125€ sensor? Aghhhh... I just haven't a clue.

Or is there a piece of the old sensor flying about inside the gearbox now? hmm....

Seems like it's probably the flywheel is broken. damn..

Cheers for the detailed explanation mate. I didn't realise the precise nature of the problem. I just gritted my teeth and paid £400 for a new one, which is winging its way to me now. I'm booked in for next monday to get it fitted by a VAg specialist/friend (so I'll lend a hand/get in the way and still pay him at the end). Sucks balls to pay this out for a 16 year old car, but it's worth a hell of a lot more here in Finland than it would be in the UK.