My first reaction was that it was a quote within an academic lecture, so what's all the fuss? I changed my mind when I saw an opinion piece in today's paper by E.J. Dionne, who said that Benedict "spoke in the voice of the academic theologian he once was and not as the leader of one of the world's great religions." He was using the quote for academic purposes, but apparently forgot that many people (mistakenly) believe his every word is claimed to be infallible. Infallibility applies only to a very few dogmatic statements about faith and morals, and the rules are such that it would be very difficult for the Pope to make an infallible statement about Islam.
Nonetheless, it seems to me that the Pope is guilty of a serious blooper, and he ought to make a sincere apology, rather than a bureaucratic one. Whatever it was he said, it came out sounding like Islam is an inherently violent religion. Al Qaeda responded by vowing to conquer the world, but Al Qaeda does not speak for most of Islam. It is essential the the Pope and all religious leaders do their best to recognize moderate Muslims and the contribution they have made to the world throughout their history.
So, the Pope blew it, and now the Catholic Church has a diplomatic disaster - but I don't think he meant to express anything insulting to Islam. He just didn't think his remarks would be heard out of context.
-Joe-