OP, do you know which whole-school system your DD's school is using? It may be something along the lines of the Ruth Miskin literacy (Read Write Inc) scheme which groups children according to their current phonic level and teaches them in small groups based upon that rather than on age.
If it is RML then children will be assessed regularly and should move up through the groups pretty rapidly. It's something that definitely needs raising with the class teacher though - does s/he realise that your DD is dyslexic? Chances are that children were all spoken to when the system was introduced and care will have been taken to explain that it's not about 'easy groups for thick children' but about helping everyone to make progress rapidly.
Meet with the teacher, explain how upset your DD is feeling and ask if s/he could explain to you how the system works and seek some reassurance that your DD will be moved to a group with more children of her age as soon as possible (schools that run these whole-school schemes will often have more than one group per level so hopefully they'll look out for a new group to slot her in to which has more KS2 children).
As a teacher I get my entire class to use rainbow writing as a way to help them learn spellings... apparently it's particularly effective for children with dyslexia as it trains the brain to recognise a pattern (rather than individual letters which can become 'uncoupled' as they are retrieved from the memory) in much the same way as a musician will practise scales.
She will need 4 or 5 different coloured pencils. Using joined up writing (this is crucial for pattern recognition) write the first word in red (or whichever colour she fancies) saying aloud each letter as she goes i.e. b-e-c-a-u-s-e then say "because" as she comes to the end. Take the next colour and write over the top, repeating each letter and the word as before. Repeat with all 4/5 colours until the word appears to have been written with one of those rainbow pencils (where the lead consists of 5 or 6 colours).
It looks pretty, can be quite therapeutic and is something that can be done alone! I use it for the whole class because I think it's beneficial for everyone to have a more physical way of rehearsing spellings and it allows children to focus purely on the word instead of having to think up sentences which require punctuation etc.
Do speak to her teacher though, I'm sure s/he wouldn't want to think that someone in the class was feeling so low about school.