XP Penalty
You can remove the multiclass XP penalty by playing a race with one of those as your favored class (like Elf), or as Human, where your class with the most levels just doesn't count no matter what it is. Human is pretty much always a good choice anyway.
And that's if your DM actually uses those rules. In my experience, quite a lot don't enforce those XP penalty rules.
Class Choice - Look at Beguiler
Sorcerer would work as a first class choice. Beguiler (Players Handbook II) would work even better, as it's also a spontaneous caster, only one whose key stat is Intelligence (same as the Wizard). This plays off a stat you already need and fits the idea of a "learned" character who also has innate ability.
Add Ultimate Magus as a Prestige Class
If you go Beguiler/Wizard or Sorceror/Wizard, you can then go into the Ultimate Magus (Complete Mage) prestige class, and boost spellcasting from both at the same time. One would go up faster than the other, but the class also lets you use spells from one to power metamagic from the other, and it can do some pretty neat things. See also What exactly are Prestige classes, and what purpose do they serve?
Instead of just taking the spontaneous spells as a one off thing, this lets you develop both of them as the character learns to blend his two types of magic together. It's a pretty neat (and powerful) concept.
This answer has some useful information on how to get the most out of Ultimate Magus.
Spontaneous Divination
Wizards can get the ability to cast any Divination spell spontaneously by trading their 5th level bonus feat for this ACF. It does what it says - you can trade any prepared spell you have to spontaneously cast any Divination spell you can cast of equal or lower level.
Other Option - Reserve Feats
If you don't want to multiclass but still want some spontaneous abilities, reserve feats are another option. These let you use some power so long as you have a spell "in reserve" that you don't cast. Examples are things like being able to do small flame strikes, shoot lightning, summon elementals, create force darts, or do some minor magic disruption. You can get that as early as level 3, and you can use them infinitely so long as you don't cast the reserved spell.
It's not as versatile as true spontaneous casting, but it also doesn't require multiclassing at all. So I felt it was wroth mentioning.
The best way for the wizard to defend a spellbook is the same as the best way for you to protect your precious computer files - have multiple backups.
But, if he hasn't had time to make a copy, if he knows someone is trying to steal the book back, he wouldn't leave the book in the shop overnight. He'd keep it on himself, likely guarded by as many guards as a 7th level wizard can afford to hire on a temporary basis.
If he must leave the book in the shop for plot points, he'd certainly have the book very well protected and secured. He's 7th level, so he knows 4th level spells. He might, for example, use Stone Shape to fabricate a 'doorless' safe in a wall or floor block. And he'd certainly know to keep the book in a lead box to block scrying and detection attempts. He could also use illusions to hide/conceal the book. And decoy books and safes to waste the thieves' time. And of course, a 1st level Alarm spell on the shop would work wonders. He might hire a dozen men at arms who hang out in a neighboring building waiting for the alarm to go off.
You say he can't use anything too damaging in terms of traps. Well, poison gas doesn't cause much physical damage and dissipates after a while. And while you say its illegal for him to create fatal traps, a) he may not care, b) bribes and Charm Person can get the well-to-do out of trouble, and c) dead thieves can't report you to the town guard. If you don't want to do that, you can always fill the shop with a Web.
Beyond defending his shop, since he knows there's likely going to be a break-in, he might have a familiar watch the shop from a distance and follow the thieves back to their home/inn/hideout. And when they aren't looking, he can rob them blind.
Best Answer
Keeping skills and class features does make sense. It accurately models how amnesia frequently works. This is also much better for the game.
By the way, “amnesia” can be “retrograde” (lost memories before the incident) or “anterograde” (unable to form new memories after the incident). In most media, “amnesia” refers specifically to retrograde.
The human brain actually stores personal memories (events that have happened to you) very separately from procedural memories (how to do things). It is entirely possible to damage one without touching the other.
In a particularly famous case, Henry Molaison, known for years in journals only as H.M., lost the ability to form new personal memories during brain surgery attempting to eliminate his severe seizures (the surgery actually worked, too, it just had a horrible side-effect). His memory simply stopped getting updated (he also lost his memories of a year or two leading up to the surgery). He remembered his childhood, his parents and siblings, but could never remember that his parents had died, what his siblings grew up to do, and so on. These things could be told to him, but the moment he stopped actively thinking about them they would disappear, with no way to recall them again. Every time he learned his parents had died, it was the first time from his perspective.
But he could learn new skills. He could navigate, and even draw a map of, the house he lived in, though he had no memory of having ever lived there as he moved there five years after his surgery. He learned to touch-type, though he had no memory of having ever seen a keyboard before. He picked up new artistic skills, learning to draw a figure from a reflection in a mirror.
Some of you may think this sounds familiar: the case directly inspired the movie Memento.
Now, anterograde amnesia (inability to form new memories) is different from retrograde amnesia (forgetting memories from before the injury, but able to create new ones), a fact that H.M.’s case actually helped to prove. That said, while there is no case as famous as H.M. for retrograde amnesia, the same facts hold true: personal memories are separate from procedural ones.
So a person could easily have all memories of ever having learned to cast a spell erased from their memory, yet still retain the ability to cast spells. If you hand him a spellbook, he may say he’s never seen one before – but he would be able to read it, prepare the spells, and cast them. For that matter, he would be able to prepare and cast read magic – the most fundamental and ingrained of wizard spells – without a spellbook.
In this case, it’s just a matter of the wizard getting a new spellbook, or recovering his old one. With no memory of where he lost it, or of any old allies or friends who might be able to help him with that, this will be more difficult than it might otherwise be, but ultimately with his ability to read and write a spellbook intact, he can do so about the same as any other wizard. As a DM, I would probably throw an opportunity or two for getting a “used” spellbook, already with a lot of level-appropriate spells on it. That will give him a good start to reforming his repertoire and allow him to participate as a character of his level ought to. The circumstances of this depend a lot on the specifics of your game: there might be a pawn shop selling it cheap, not realizing its value, or taken from a defeated enemy wizard, or found in a catacomb or ruin somewhere. Or, if you don’t mind a huge timeskip, find a way for him to earn access to a magical library and let him spend a few months recreating a basic spellbook.
Obviously, for such a character, he will also want to learn about his past. This will most likely be an extended quest/plot arc, but somewhere along the way he may come across his old spellbook. Could be interesting to see if he goes back to it, or continues to use his new one.
All that said, it’s also possible to lose procedural memory (with or without losing personal memories), or to be unable to form new procedural memories (again, with or without affecting personal memories). So you could lose your class features.
I don’t recommend you do that. If you must, the best way to model it is that this resets the person’s XP to zero (retrograde), or prevents the acquisition of further XP, locking it where it is (anterograde). Obviously, this completely changes a game, and if it only happens to one person he probably cannot continue to quest with the same party. But someone with retrograde procedural amnesia is, in some effect, a blank slate. It does not make much sense that he would remember how to do some things (better ways of attacking, heightened reflexes, greater mental discipline, training in skills, and so on) but not others (how to cast a spell), so leaving class levels but taking away class features (à la a fallen paladin) does not make very much sense.1
I don’t think this makes for a very good game. The powerful wizard, still able to cast powerful spells, but with no memory of ever having learned the spells and no personal knowledge of how they are used, is an interesting case, fun to play. Restarting from 1st... well, that can be interesting too, but it’s basically the start of a new game, with a reference to the previous one.
1 Actually, it’s probably possible, but it would have to be extremely specific brain damage. I don’t recommend turning players into high-level commoners in any event, though.