I can sympathize with your son. I was also bullied through school, and while not over or under average height, felt pretty much the same. The only time people did stop was when I finally snapped, and ended up bloodying someone else's nose, which he didn't expect. I was never physically bullied by him or anyone else after that, the verbal taunting was still there but I could deal with it.
While he may not have the coordination for Karate, it will teach him to block physical attacks by other kids, so don't stop. You may want to ask him about boxing (or just plain fist-fighting--since fights are never planned or fair)...if he ever gets angry enough to throw a punch, he's probably going to need to pull it a bit...remember, he wants to hurt them, but not knock them out--he'll need to know how to do one in order to know how to do the other.
Whatever you both decide, good luck to you both, and my best wishes to him--his patience with the ignorance of others is very much a testament to his good character.