Flopsy, this is tough stuff for a patient. Read this: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2200758/. In a nutshell, nearly everyone is helped by cervical discectomy immediately and 2/3 will still be doing well years later. If it were me, I think I would have have the op.
A question for your physio...do they work in a multidisciplinary team with a neurosurgeon? This is essential for best advice.
Do not hang too much importance on the MRI scan. It cannot reliably tell you if a nerve is being acutely pinched. You need nerve conduction studies to prove that. What the scan will tell you is if the rate of deterioration is stable or accelerating or if your spinal cord is at risk.

Good luck, stay calm and ask informed questions. The op itself sounds frightening but its quite straightforward...in expert hands.