I'm not sure of the source of that story, I just heard it in a talk by a Rabbi on national revelation. He was underlining the importance of national revelation in Judaism. I could find the source for you, if you wish.

Okay, then the Palestinians broke a truce with this latest infitada. Should they all be slaughtered? Of course not.

Regardless, there are problems with killing the Jews of Medina, the groups of them were not all allied. So even if you had problems with the alliances of one, why would you kill the others? It is not clear if the Jews warred against Muhammed, from the accounts I have seen, but there is another question to be asked. If the Jews who were going to be killed could escape death by converting to Islam, isn't this not carrying out a treaty but rather forced conversion? I'm not sure if you want to go into an in-depth discussion of those events, they do seem fairly irrelevant to what we've been talking about.

I can't complain about the Caliphate controlling Jerusalem and religious tolerance, but with the Crusades and the Mamluk/Ottoman periods things started to decline.