the Qur'an condemns the other religions as false
The Creator has taught us in the Qur'an and Sunnah that all other `religions' and ways of life are unacceptable to Him if a person is aware of Islam. The Qur'an states (translation),
"And whoever desires a religion other than Islam, it shall not be accepted from him, and in the hereafter he shall be one of the losers."[3:85]
However, even though the Creator has clearly specified that no other way of life is acceptable to Him except Islam (i.e. submission to Him as embodied in the Qur'an and Sunnah), He has also commanded the Muslims to be tolerant of people who espouse other creeds. From the Sunnah, specifically in the study of the Sunnah called Al-Awsat by Al-Tabarani, we find regarding those non-Muslims living in the Islamic state,
The Messenger of Allah (saas) said, "One who kills a non-Muslim person under protection (Arabic: dhimmi) will not even smell the fragrance of Paradise."
Also from the Sunnah, specifically in a report from Al-Khatib, we find that the Messenger of Allah (saas) also said:
Whoever hurts a non-Muslim person under protection, I am his adversary, and I shall be an adversary to him on the Day of Resurrection.
In short, Islam is intolerant of false ideas, however it is tolerant of the people who hold to those ideas. One historical example of Muslims living up to the standard of Islam can be found from the time of the Spanish Inquisition. During that disaster sprung by misguided Catholics, some Spanish Jews fled to Muslim Turkey and to this day, there is a community of Spanish-speaking Jews in Turkey. Another example may be found during one of the Crusader invasions from Western Europe. Some of the the Catholic Western European knights were so likely to rape, murder, and pillage the Jews and Orthodox Christians, that when the Muslims won, they were treated as a liberating force by those non-Muslims.
The dealings of the Prophet, may the mercy and blessings of God be upon him, with other religions can best be described in the verse of the Quran:
“To you be your religion, to me be mine.”
The Arabian Peninsula during the time of the Prophet was a region in which various faiths were present. There were Christians, Jews, Zoroastrians, polytheists, and others not affiliated with any religion. When one looks into the life of the Prophet, one may draw on many examples to portray the high level of tolerance shown to people of other faiths.
Marmaduke Pickthall, whose translation of the meanings of the Qur'an remains one of the most popular today, also commented on the subject:
In Spain under the Umayyads and in Baghdad under the Abbasid Khalifas, Christians and Jews, equally with Muslims, were admitted to the Schools and universities - not only that, but were boarded and lodged in hostels at the cost of the state. When the Moors were driven out of Spain, the Christian conquerors held a terrific persecution of the Jews. Those who were fortunate enough to escape fled, some of them to Morocco and many hundreds to the Turkish empire, where their descendants still live in separate communities, and still speak among themselves an antiquated form of Spanish. The Muslim empire was a refuge for all those who fled from persecution by the Inquisition.
The Western Christians, till the arrival of the Encyclopaedists in the eighteenth century, did not know and did not care to know, what the Muslim believed, nor did the Western Christian seek to know the views of Eastern Christians with regard to them. The Christian Church was already split in two, and in the end, it came to such a pass that the Eastern Christians, as Gibbon shows, preferred Muslim rule, which allowed them to practice their own form of religion and adhere to their peculiar dogmas, to the rule of fellow Christians who would have made them Roman Catholics or wiped them out.
If Europe had known as much of Islam, as Muslims knew of Christendom, in those days, those mad, adventurous, occasionally chivalrous and heroic, but utterly fanatical outbreak known as the Crusades could not have taken place, for they were based on a complete misapprehension.
It was not until the Western nations broke away from their religious law that they became more tolerant; and it was only when the Muslims fell away from their religious law that they declined in tolerance and other evidences of the highest culture. Before the coming of Islam it had never been preached as an essential part of religion.” (Madras Lectures on Islam)
In this age of racial profiling and targeted killings directed at Muslims this, Islam's, true attitude towards religious tolerance may sound other-worldly.