I think you would be wise to channel his athletic skills to another team sport in which he can actually excel and participate (soccer? gymnastics? baseball? even hockey - there is a boy on our junior high team who is literally a foot shorter than the average players and he does great) regardless of his physical limitations. There are very few sports out there where size is the key determining factor to safety and success and unfortunately, football is one of them.
One of my brothers had a congenital hip deformity that required leg braces. He loved basketball and was quite good at it, but the running and pounding at the high school level were too damaging so at some point, he had to just stop playing. He and my parents knew this was coming for years but they didn't prepare him for something else like baseball so he was left with no sport at all. My other brother was built to play football and was approached by the coaches year after year but with a seizure disorder, my parents would never let him play. So he ran track and played basketball instead.
I would talk to the staff at the Y program and see how they accommodate large differences in size. I know that our pop-warner program runs on a combination of weight and age. If you can be comfortable with the program for this year, go ahead and let him play but find different sports for winter and spring and see if you can get him into something else besides football next year.
It's hard for talented kids to be limited by their own bodies but that's just the way life is sometimes. Help guide him towards what he can do and he'll eventually learn to just be a spectator and fan for what he can't do (or he can be the equipment manager or stats keeper).
