With no compression in cylinder #2, I can't understand why disconnecting the spark plug wire for that cylinder caused the knocking to stop.

You posted below this that your headgasket needs to be replaced. I would replace the gasket, have the head checked to make sure that it is true and also do a valve job while you are in there. A good shop can plane the head and do a valve job for a few hundred dollars.

Next, I would put the car on a lift (or on ramps if they give you enough clearance), drop the oil pan and take a look at the connecting rod bearings. Your oil pressure indicates that they are probably 'good', but the bearings can be plastigauged to determine actual wear.

If the bottom end checks out, I wouldn't bother rebuilding the engine. Put the cleaned up head on with a new gasket and see if the noise isn't gone.