Why is Jerusalem important to Muslims

It was the place of Muhammad's ascension, at the end of Isra ("the night journey", from Mecca to Jerusalem).

Apart from the historical significance that it shares for Jews, Muslims, and Christians, in relation to the Old Testament kings and prophets (Muslims view David and Solomon as major prophets), is taken to be the place where Mohammad ascended on his night-journey to Paradise. The Prophet's footprint can be seen on a rock contained in the al-Aqsa mosque on Temple Moun

Jerusalem was very important to Muslims from very early times (passages in the Qur'an seem to suggest that Muslims originally bowed to Jerusalem rather than Mecca), and a mosque was established at Jerusalem by the second caliph 'Umar.