The Wachowski brothers have already said the "Matrix within a Matrix" concept isn't in the script. (it would be too obvious and kinda lame) Next theory.
Besides, it would invalidate everything the Architect had said. The whole point of the Prophecy and The One is that they could not construct a Matrix which 100% of the people would accept as reality. 1% of them reject it to some extent, and some "wake up". Thus, the Oracle and the Architect came up with a solution to control that 1% who escape to the real world and can't be assimilated: Offer them a phony prophecy and rebel city to collect all of them into one place. When they become too numerous, destroy it. Since the One is capable of greatly screwing over the Matrix (and seeing through any illusions they create), he is given a voluntary choice: Voluntarily give up his powers or his life (the Oracle says "programs" and have to be deleted are given two choices: return to the matrix and hide, or accept "exile" and return to the Source) and in return, the Architect will let him choose a handful of humans to continue the rebel movement.
If he decides to return to the Matrix (in this case, to save Trinity), the Matrix will eventually crash, and everyone plugged into it will die.
There has to be a difference explaination for Neo's powers in the real world. I'm favoring the cyborg theory: Neo isn't just a regular human anymore. First, all throughout the movie, they speak of Neo as being enhanced (Architect: "despite your alterations, you remain, irrevocably human"). Persphone says to Neo "He was like you once" (Merovingian). Therefore, it is possible that the implants that Neo has in his brain are somehow different than other people's, perhaps he is much more Borgified, with a wireless LAN connection to the machine network.
Anyway, Smith, Merovingian, the Architect, and Oracle all refer to Neo as some sort of program or code.
If you rewatch the major speeches in the film, you will find that alot more is being said. Also, look up the literary history of the Merovingian.