Bush was able to recover just fine withdrawing Harriet Myers as a Supreme Court nominee. In theory, McCain could similarly bring out a "blockbuster" nominee to replace Palin.

In the end, I don't think it would change much. Democratic partisans would harsh on him either way. Republican partisans would love him, either way. Independents (arguably) don't care about these kinds of little details, but may be nudged by Democratic arguments about whether McCain will continue to do this sort of thing in the future.