According to section 5.1 [1] of tor's specification. During the last CREATE
On failure, a server sends a
DESTROY cell to tear down the circuit.
Specifically, Section 5.4 [2] states the circuit will be torn-down by sending DESTROY back towards the client with the appropriate error code [3] in the payload.
Or chooses a new circuit completely ?
Correct. From Section 2.5 [4] of the path specification
Requests that might have been
supported by the pending circuit thus become unsupported, and a new
circuit needs to be constructed.
[1] Section 5.1
[2] Section 5.4
[3] Error codes
[4] Section 2.5