Peter T Chattaway has rounded up a number of different news articles on the story, so I recommend you read his post and the various links he has assembled.
One thing that does seem strange is that there are already two films that provide something of a precedent here. Firstly, the Jesus film (1979), has, of course, been translated into Arabic already. Secondly, as others have pointed out, The Passion of the Christ played in Egypt without problems. Indeed some cited its generally positive reception as evidence of its anti-Semitism.
Part of the reason I was slow out of the blocks on this one is that I'm not overly optimistic that it will ever get made. I hope it does. Whilst I eagerly anticipate seeing this years' films such as Son of Man and Color of the Cross, which have black actors playing Jesus, I long for the day that a Jewish / Middle Eastern actor plays him. I am amazed that no-one has done this yet. Of course Carl Dreyer spent 16 years trying to make a film about the Jewish Jesus. (There is an interesting Variety article on this). It seems strange that so long after that project failed we are still awaiting another one - despite the frequent aspirations to realism that Jesus film directors routinely trot out. Anyway, hopefully this will be the first film to use someone from Jesus' part of the world to take on the role.
1 - "Al Azhar objects to Egyptian-made Jesus movie", Middle Eastern Times, International Edition. March 20, 2006
2 - "Egypt: Muslims Oppose Planned Film On Jesus" - AllAfrica.com