Here's what you need to consider, cutting your losses as is Foreclosure or Short Selling is going to stick with you and affect your capacity to get a loan in the future, and not just for a house. It can affect credit cards, cars and other consumer debt.
If you have the means to buy elsewhere and can break even on rent, find a great local property manager and look into this option. It can be a long term investment if handled well and preserve your credit.
You are in good company buying in 2007. In many markets, values are back and in others they've come close. Time may be on your side if you find the right tenant and property manager. Since you are already a landlord, you know some of the pros & cons and you'll never buy another home you know as well as this one.
If you can sell and write a check you can avoid the downside of foreclosure or short sale and while that would be a hard pill to swallow, in the long range better choice than damaging your credit.