Hi
If the school are aware that the issue is handwriting/coordination rather than ability, they should be supplying whatever support he needs to reach his potential, rather than moving him to a lower set.
If you feel you need more evidence of his ability being higher than his achievements to date, you can ask for the Ed Psychs to do an assessment. My ds had the WISC IV test done (this doesn't rely on handwriting to assess ability) and it showed that he is very bright but his physical/visual/motor problems and processing delay are holding him back.
As a result, he is still in the top groups for everything at school, but has an Alphasmart (like a very basic laptop or electronic typewriter) to do larger pieces of work on. In order to do be able to do this, we got him to learn to touchtype using the BBC Tap Typing online programe, which is good fun and he really enjoys. He started off doing about half an hour three times a week and now he does ten minutes a night.
He still writes short pieces and numeracy at school and on the advice of the OT we use his spelling homework as 10 minutes handwriting and letter formation practise a day, using either the stablio ergo pencil (which helps children with poor grip to hold it the right way) or his yoro pencil (he's non-dominant but prefers his left hand for writing). The OT also recommended that he shouldn't be forced to learn cursive writing, as print is easier for him to manage.
He does have extra support in a small group in addition to being in the top groups though and a lot of the other children in that group are low achievers for various reasons, but they all need similar basic help and support, which is why they do it as a group rather than individually.
We've also bought him some caring cutlery which means he's actually cutting up his own food for the first time ever.
There'some great advice on here, I would definitely second the BABO assessment (we are doing this with ds1 soon) although its worth either going to an ordinary Optician or asking your GP for a referral to the NHS Paed Eye clinic in the first instance to rule out any other problems.
We were also advised by the OT that pilates and a martial art will help with his core strength (ds's core strength is particularly poor) as will him using a wobble cushion in class and at the table at home. We bought him a balance board last summer and he's getting quite good on it now.
For hand strength, google Theraputty. It comes in different strengths and kids love playing with it. Just squeezing and stretching it will help with hand strength to some degree, but you can also google exercises to do with it. Hama beads are great for fine motor, they come in different sizes and you can get kits that make cars and trucks etc - both my dses (almost 7 and almost 9 years old) love doing hama beads.
The key for us so far has been to find fun things to do so that he doesn't know he's doing exercises and keep the sessions short but regular.
Take some time to let yourself take in the diagnosis and do some reading and research, nothing has to change overnight.
Good luck.