Simply put, it makes Americans appear hypocritical. Our country was founded on freedom of religion; it's the very reason our forefathers came here!
Secondly, it causes suspicion and division, two things that are potentially causes for violence.
Most importantly, when all of this negativity is broadcast worldwide, it puts our soldiers overseas (and here, for that matter!) in danger. They become targets as tensions rise.
The goal is not just "tolerance" but acceptance. People should learn about the REAL Muslim religion and how it differs from the "fundamentalists" that create the chaos!
"Us demonizing Muslims" is pretty strong language, and I think I'd take exception to your exact language. It is true that there has been a recent outburst of negative anti-Muslim sentiment over the proposed mosque in New York; however, I do see reasonable people rejecting the plan on reasonable grounds--not just out of hatred for this particular religious group. That being said, anyone who spews hate--any person or group of people from any country or religion or culture--will receive it in return. That's just a basic principle of reaping and sowing.
It is hard to know what the result of American anger towards Muslims will be. It is not the sort of thing where we see a clear result two days later.
When I see American attitudes towards Muslims, I worry about two possible bad results.
First, we could make Muslims around the world hate us and distrust us. This could be very bad for us because many Muslim countries are in places (like the Middle East) that are very important to us.
Second, we could be harming ourselves by doing this. In my opinion, tolerance of others is an American value. If we continue to demonize Muslims, might we not weaken our own society by making it more of a place where people hate others who are not like them?
Demonising any community cannot be justified on any grounds. It can lead to major miseries for the humanity. The holocaust, resulting in death of millions of Jews in Europe is the result of such public propaganda against a community.
It is quite possible that people from a particular community, may mislead people of their community, to commit general crimes against other community. But the solution of such acts is to free the community from the influence of the offending leaders, rather than branding them as demons and developing against them. For example, no purpose could have been served by demonising Christian of some European countries because of the Holocaust. The correct response was to free the them from the power and influence of people like Hitler.
By demonizing Muslim we will only increase the influence of the leaders who mislead them. Also, this can develop wrong kind of prejudices among the communities that demonise others, making them more vulnerable to follow leaders that wish to lead them to engage in demonic activities against other communities. Things like these do not solve any conflicts between communities. They only escalate and prolong the conflicts.