@MRB21 You’re absolutely not being overdramatic. Your dad gave you that ring as a gift, that means it’s yours. End of.
You’ve worn it, cherished it, and it’s the only thing you have of your grandmother. The sentimental value is huge, and he knows that.
Asking for it back so he can regift it to a woman he’s known for six months (who never even met your grandmother) is completely unreasonable. It’s not a “family heirloom” he’s carefully passing down, it’s something he’s already given to you, and now wants to take back because it’s convenient for him. Also, he gave it to you as his daughter and so what is he implying, that you have been moved down in his rankings. Yeah, pretty insensitive.
Also its a wedding ring not an engagement ring. Is he wanting to marry her because wanting to give her a sentimental engagement ring, I sort of get, although not if he has already gifted it elsewhere. But a wedding ring???
You don’t take back a gift. You don’t re‑gift a dead woman’s wedding ring to a new girlfriend. And you certainly don’t expect your daughter to hand over the only thing she has of her grandmother so you can impress someone you barely know.
Tell him kindly but firmly that the ring is yours, it means a great deal to you, as you thought he acknowledged when he gave it to you and you won’t be giving it back. That’s not selfish, that’s normal. His request is what’s out of line.
Tell him to take her shopping for a ring, we all know she would love to chose her own. Maybe he is tight fisted or just plain skint and if she is any type of decent woman she would be mortified if she knew what he was asking,