1. Why there's no alternative:
He cannot use anything less poisonous up until the point he re-discovers the new element that Howard Stark had thought of.
At one point in the movie J.A.R.V.I.S. mentions that
"I have run simulations on every known element, and none can serve as a
viable replacement for the palladium core. You are running out of both
time and options. Unfortunately, the device that's keeping you alive
is also killing you."
This means that there was no "something less poisonous" that he could have used.
Also, There are no other clean energy sources that could've generated the amounts of power required by the magnet. This was significantly bigger than a pacemaker, so he couldn't have used a battery of that sort. And no battery could've given him the levels of energy required for the magnet. Plus the arc reactor was already integrated into his chest.
2. Why he doesn't continue wearing the suit:
J.A.R.V.I.S.: It appears that the continued use of the Iron Man suit is
accelerating your condition.
Using a suit based reactor would mean he would have to use the suit more often, which would have in turn worsened the reaction to Palladium, as seen from what J.A.R.V.I.S says.
Also, another reason he puts the reactor directly into his chest is so that he doesn't depend on the reactor in the suit for life support.