For me that is not a very important question since Muhammad's illiteracy doesn't prove anything. The famous classical Greek poet Homer was blind and hence couldn't read or write either. But he composed one of the most famous pieces of literature.
Nobody would conclude that he was therefore a prophet. One can say anything orally that one could write by hand. One can hear anything read or narrated by others that one could read with one's own eyes.
Whether Muhammad had the technical ability to read and write or not, doesn't not imply anything about the source of his speech or the possibility of having been informed by others orally.
As such, taking this criterion as a proof of his prophethood is not very strong.
Also, Muslims tell emphasize that the Qur'an and the Muhammad in some hadith stress learning and to seek knowledge. The process of learning and growing in knowledge is certainly much easier if one can read and write.
If Muhammad indeed put such a strong emphasis on learning, why would he for all of his life insist to not learn himself? First of all: Not learn to read and write, second to use reading to learn more? Is he disobedient to his own exhortations?
In any case, the chapter at the following link presents many quotes from the Muslim sources and a thorough reasoning in regard to the question of Muhammad's illiteracy.
An entry in the Comparative Index to Islam
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