Golden Dragon -
Sorry this is lengthy. Your friend is very lucky that you didn't reciprocate his escalating behavior back at him. Just from your writing I am impressed that you not only pushed him away while giving him an "out" but you also withstood his insults as you walked away knowing that you could have physically made him stop. However, I have to say that you could have been more forceful in your demand to ask him to stop... or else told him that he was too good for you to beat and thus diffuse his attack. Remember knowing when to fight is just as important as the fight itself.
That said... I am curious if this "friend" is able to realize your friendship?!? Is he worth "mending a broken fence"? If he is worth having as a friend then in another post I could suggest some ways to try and recover your friendship. Good friends are rare commodities and you sound like you can be a true friend to this guy. In addition you will probably miss the ability to call upon him if you ever need his help. Yet, if he is not the type that will stop the name calling and cheapshots then stay away from him but keep a watchful eye whenever you catch wind of him. Many guys don't like to look bad in front of other people and they'll try to get even. I knew a young man that acted like this and I had to watch my back everytime I went out to play football or baseball in our neighborhood. I tried many times to tell him that I didn't want to fight and wanted him as my friend (the guy lived right next door to me). Things would be good for a few weeks but later on it was right back to the same pi$$poor behavior.
I was in many fights with him but they were on fair terms not on an uneven or cheapshot basis like he would have liked.