What is wrong is the idea that one can actually make the disk rotate; and it will remain perfectly rigid.
In reality, what this correct argument shows is that relativity doesn't admit the existence of any perfectly rigid bodies. This is a perfectly basic, settled, and indisputable textbook material that every mature physicist knows. The first sentence of this paragraph contains a link to the Gravity Probe B website. The thought experiment is known as the Ehrenfest paradox and Ehrenfest himself already offered the right basic answer – no rigid objects exist in relativity – when he outlined the thought experiment in 1909.
When one takes a solid disk and makes it rotate, it will do all kinds of things resulting from the "imperfection of the material". It will tear apart by the centrifugal force, and if it won't, it will either tear basically along radial lines, or it will bend (the disk won't be planar anymore) because the circumference really shrinks by the Lorentz factor. If there existed a material that is perfectly rigid and cannot stretch or bend or tear, then it would be impossible to make it spin. In any world governed by relativity, the proper distances between the individual points/atoms of the objects simply have to change when the object is brought to motion. (The definition of rigidity using the constant proper distances between points/atoms of the object was given by Max Born in 1909 and is known as the Born rigidity.)
However, the non-existence of such a material may be shown even microscopically. It is not possible to "order" any solid object to keep the proper distances at every moment because the distance between two atoms (or points on the solid object) may only be measured with a delay $\Delta t = \Delta x / c$ simply because no information may move faster than light. That's why it's always possible to squeeze any rod on one end and the opposite end of the rod won't move at least for this $\Delta t = \Delta x / c$. This relationship between the "limited speed of signals by $c$" and "non-existence of rigid objects in relativity" was already pointed out by Max von Laue in 1911.
In fact, the delay will be much larger than that, dictated basically by the speed of sound, not by the speed of light. Whatever material you have, relativity guarantees that it can be squeezed as well as stretched as well as bent.