I do think you missed a step or two and I don't think an option for 'lack of citations' in the review queue is going to fix the issue(s) you describe here.
I see two issues in your post:
- Having to press 'Looks OK', when you think a post is clearly wrong.
- Having no option to say 'this post lacks citations and should be deleted'.
While I agree the first one isn't a very intuitive option for posts where a downvote + comment are the way to go, the second point requires the site to have a policy of deleting answers that lack citations. Not every site has that, I think there are in fact very few sites that actually do this. Which would mean that the second round of review you're proposing (after adding the 'citation needed' post notice) would still end up with a verdict that recommends the post stay on the site, as long as the site it's on doesn't have a policy of deleting posts that lack citations.
When a site already has decided posts without citations should be deleted, people can choose the 'delete' option when reviewing, and voting to delete an answer because it lacks citations could be an option shown in the dialog after you press 'delete'. Again though, without a site policy that recommends answers without citations are deleted, having such an option in the review queue won't magically give you a tool to get 'wrong' answers deleted.
Of the sites I know that delete answers that lack citations, it doesn't matter if the answer is right or wrong: It's the lack of citations that makes those answers eligible for deletion.
Even with citations, you can still come to a 'wrong' answer, see e.g. anti-vaxxers and that 'vaccines cause autism' article they often cite. "Wrong" citations, referring to outdated, fraudulent or misinterpreted research will still result in "wrong" answers, and there's still nothing you can do but press 'Looks OK' in the review queues when the citations are there.
On the other hand, 'correct' answers can also lack citations, making their quality too low for a site, and making those answers eligible for deletion. This is mainly a 'problem' on sites where an answer that doesn't cite research or personal experience can still sound 'correct' or like 'common sense', but it actually is nothing more than an opinion instead of an answer sharing expertise. You can get massive amounts of upvotes for expressing a popular opinion, especially on HNQ.
I agree that 'Looks OK' isn't a very intuitive option for posts where a downvote + comment are the way to go. But rephrasing 'Look OK, this post is good as-is and not low quality' to 'Don't Delete, this post should not be deleted' would be a more accurate solution to your original problem (a wrong answer in the review queue) than adding an option to delete those kinds of posts for not having citations.
As to first adding a 'needs citation' post notice to those answers that are elegible for deletion because of lack of citations, or immediately allow people to vote to delete, I'm leaning towards just immediately voting to delete: It hides stuff that isn't suitable for the site as soon as possible, and if people do edit, the post can be undeleted again. Additionally, having a post go through review twice, requiring more people to vote on it (first to get it a banner, then to get it deleted) is just creating more work.
