Well, I prefer pronunciation number 2 (living in Washington state, but originally from SoCal). I refuse to be intimidated by so-called "correct" pronunciation of anything after looking up the pronunciation of "quixotic" in the dictionary. I mean, if you're going to steal words from other languages, the least you can do is steal the pronunciation as well. Humph!
And I say PEE-oh-nee. I have a friend in Oregon who insists it's pronounced pee-OH-nee.