You can edit 1080P in a 1080P sequence and export to 720P without a problem. I just don't think that is what you really want to do.
However, perhaps I don't understand exactly what you meant.
If you zoomed into 1080P footage - you did lose quality. If you look at the clips you see something over 100% in the Motion effect's Scale parameter. Right?
If you had edited in a 720P sequence, then you would have needed to scale down whatever you did NOT want to see as zoomed in as you described. But by not scaling it down, it would have looked zoomed in but without the loss of quality - because it was still at 100%. Even if you needed to zoom in more, and risk the quality loss, it would be less loss than in a 1080P sequence.
So, basically, yes, you need to select and copy the entire sequence and paste it into a 720P sequence. The resize everything. Non zoomed footage to the 66.7 figure and zoomed in footage to 100%. I suggest 100% because then you will know when you have exceeded 100% and you will be able to make an informed decision about zooming past 100%.
Make sense? Or did I not understand your needs?
I remember shooting video with my HDV camera back in the days when we were all posting videos at 320X240 to save bandwidth because some people were still using dial-up modems, or because our web sites had monthly bandwidth restrictions. I would shoot 1080 but be able to zoom WAY in by editing in a 320X240 sequence. Although it was just called a timeline back then, not a sequence, since there was only one per project.
I shot the surfers in this video from a pretty great distance. But, since I only needed a very small part of the HDV frame in my tiny little frame, it looks like I was able to get relatively close. Here is a frame from that video I entered into a contest on these forums all those years ago. He was a tiny little bit in an HDV frame. But in a 320X240 frame he fits quite nicely.
Thanks. That answers my question. I went ahead and just did it anyway before I got a reply, since it was only a 3-min video with less than 40 clips total - but I still kinda wonder if Premiere is smart-enough to recognize what the end-result is and process it the same way... If nothing else, it sure does render the clips I used the Neat Video plugin on - since Neat Video sees it as 720p now! I wish I had done this from the start -