Hello Magic
1. While X, Y.
In this structure, when "while" has a temporal sense, Y takes place during X. So we can't imagine Y happening before X.
Thus sentence #2 doesn't make sense: if the reading happens before the coming, as the past perfect suggests, we can't use "while" (in a temporal sense).
So your initial instinct was correct: "While he was reading, his uncle came back" is the correct sentence.
All the best,
MrP