The gravitational time dilation for a static "shell" observer in the Schwarzschild metric observed from infinity is
$$ d\tau_{\rm shell} = dt\left( 1 - \frac{r_s}{r}\right)^{1/2}\ .$$
We could label this as the "General Relativistic time dilation".
The speed of an object in a circular orbit around a central mass, as measured by the stationary shell observer at radius $r$, is
$$ v_{\rm shell} = c\left(\frac{r_s}{2(r-r_s)}\right)^{1/2}\ .$$
The time dilation due to the orbital motion with respect to the local inertial frame of the shell observer is
$$d\tau = \frac{dt_{\rm shell}}{\gamma_{\rm shell}}\ ,$$
where $\tau$ here is proper time measured by the orbiting observer.
We could label this as the "Special Relativistic time dilation".
In a local inertial frame, $dt_{\rm shell} = d\tau_{\rm shell}$, so
$$d \tau = \gamma_{\rm shell}^{-1}\ d\tau_{\rm shell} = \left( 1 - \frac{r_s}{r}\right)^{1/2} \gamma_{\rm shell}^{-1}\ dt\ ,$$
and we are effectively multiplying the "General Relativistic" and "Special Relativistic" time dilations to get$^{*}$
$$ d\tau = \left[ \left(1 - \frac{r_s}{r}\right)\left(1 - \frac{r_s}{2(r-r_s)}\right) \right]^{1/2} = \left(1 - \frac{3r_s}{2r}\right)^{1/2}\ .$$
No approximations have been made, this is an exact result.
EDIT: To address the last part of the question.
In the more "holistic" version of the calculation - directly using the Schwarzschild metric - the question arises as to why one uses the "Newtonian" value of $v = rd\phi/dt = (GM/r)^{1/2}$? Note that this is not an assumption or an approximation, it is exactly true for the Schwarzschild metric.
Apologies, but this is a lengthy derivation. To see this we have to go back to geodesics in the Schwarzschild metric, which are defined in terms of the two constants of motion that are often labelled $E/mc^2$ and $L/m$, the coordinate specific energy and coordinate specific angular momentum respectively.
In terms of these quantities, the rate of change of radial coordinate with respect to proper time can be written
$$ \frac{dr}{d\tau} = \pm c\left[ \left(\frac{E}{mc^2}\right)^2 - \left(1 - \frac{r_s}{r}\right)\left(1 + \frac{L^2}{m^2r^2c^2}\right) \right]^{1/2}\ , \tag*{(1)} $$
where
$$ \left(1 - \frac{r_s}{r}\right)\frac{dt}{d\tau} = \frac{E}{mc^2}\ , $$
$$ r^2 \frac{d\phi}{d\tau} = \frac{L}{m}\ . $$
We can now express the circular velocity as seen by a distant observer, $v_{\rm circ} = r d\phi/dt$ as :
$$ v_{\rm circ}^2 = r^2\left(\frac{d\phi}{dt}\right)^2 = r^2\left(\frac{d\phi}{d\tau}\right)^2 \left(\frac{d\tau}{dt}\right)^2 = \frac{L^2}{m^2r^2} \left(1 - \frac{r_s}{r}\right)^2 \left(\frac{mc^2}{E}\right)^2\, . $$
But for a circular orbit $dr/d\tau=0$ and eqn. (1) gives us a relation between $E$ and $L$ --
$$ \left(\frac{E^2}{mc^2}\right)^2 = \left(1 - \frac{r_s}{r}\right)\left(1 + \frac{L^2}{m^2r^2c^2}\right) \ ; $$
and substituting this into the equation for $v_{\rm circ}^2$, we get
$$ v_{\rm circ}^2 = \frac{L^2}{m^2 r^2} \left(1 - \frac{r_s}{r}\right) \left(1 + \frac{L^2}{m^2 r^2 c^2}\right)^{-1} . \tag*{(2)} $$
The last part of the puzzle is to find an expression for $L/m$ in terms of the radial coordinate for a circular orbit. This is done by writing an expression for the effective potential in the Schwarzschild metric and finding where it is a minimum. Thus:
$$ \frac{V_{\rm eff}}{mc^2} = -\frac{r_s}{2r} +\frac{L^2}{2m^2r^2c^2} - \frac{r_sL^2}{2m^2 r^3 c^2}\ . $$
Differentiating and equating to zero, we get
$$ \left(\frac{L}{m}\right)^2 = \frac{c^2\,r^2\,r_s}{2r - 3r_s}\ . \tag*{(3)} $$
Replacing $L^2/m^2$ in eqn. (2) using eqn. (3),
\begin{eqnarray}
v_{\rm circ}^2 & = & c^2\left(\frac{2r_s}{2r- 3r_s}\right) \left(1 - \frac{r_s}{r}\right) \left(1 + \frac{r_s}{2r-3r_s}\right)^{-1} \nonumber \\
& = & c^2 \left(\frac{2r_s}{2r- 3r_s}\right) \left(\frac{r - r_s}{r}\right)\left(\frac{2r - 3r_s}{2r -2r_s}\right) \nonumber \\
& = & c^2\, \frac{r_s}{2r} = \frac{GM}{r}\, .
\end{eqnarray}
Thus the coordinate speed according to a distant observer is $\sqrt{GM/r}$, the same as the Newtonian result!