Cia,
I am going to play devil's advocate for a moment. I am sure that you have thought of other rooms prior to this question. I am going to ask you a question. Is your sex drive in the toilet? Are you using the children sleeping there as an excuse to say no?
If this is the case you need to examine yourself or your relationship.
If you do not have a sex drive, go to your doctor. It may be caused by a slight depression. If that is the case do not get a SSRI (classification of depressive medication), ask for a trycilic antidepressent, aka amytriptline. If it is not depression, your hormones may be out of whack and that may be part of the problem. Either way, I suggest that you go to visit your doctor.
If you are using your kids as an excuse to say no, then you need to examine the relationship as a whole. When talking use I statements as opposed to you statments (I feel . . ., I need your help with . . ., etc).
As far as damage to the psyches of the children, i would not worry about the infant, but the older child my hear and think that daddy is hurting mommy. As far as the older one being in the room, I do agree that this may cause some attachment problems down the line. You may want to start putting him in his room one night a week at a time. He will cry, but you have to be strong and let him cry himself to sleep and he will get used to it. Then, maybe once a week, if he has been a good boy, let him sleep in your room as a special treat like a sleep over.
Good luck.
L.