Even if you do get the remnants of the old nipple out of there, it may have messed up the threads enough that getting a good seal with a new one may be impossible. ANd, being behind the tile, it would be harder to tell for sure. If you DO get it out of there, put a new brass nipple in and cap it, then turn on the water to see if the connection leaks. Steel in potable water lines is not, nor ever was, a great idea; even if it was galvanized. But, it was what was available. Brass or copper or bronze can last a very long time, in potable water (potable water has fresh oxygen in it, iron pipe can work in a closed system because all of the O2 gets used up and then the water is essentially close to inert), iron has a much more limited lifetime. Depending on the spout you have, you might solder a copper or brass threaded connection onto a copper pipe, and screw that in and test...if it seals, cut off the excess and install the new spout. I'd be worried about that connection, though. Do you know what the rest of the plumbing pipe and fittings behind the wall are? If galvanized, that might only be the tip of the iceberg.