The best understanding of Benedict XVI and Islam that I've seen is found at The Observer, where a short history of Manuel Palaiologos is also found. The author, John Hooper in Rome, states:
Also read the short post by Mary Alexander who notes that the flag of Saudi Arabia displays a sword--wonder where that came from?
Under Benedict, the key issue, in Vatican-speak, is not 'dialogue' but 'reciprocity'. Even before his election, there was a growing feeling among Catholic prelates that dialogue with Islam consisted largely of Catholic initiatives.
What is more, endless discussion did not seem to be solving the biggest outstanding problem between the two religions: that while Muslims were free to build mosques, worship and proselytise in the West, Christians were often denied religious freedom in Islamic countries.