Paul Marshall writes in National Review Online that "Even if Newsweek publishes a full retraction, the damage is done":

Much of the Muslim world will regard [a retraction] merely as a cover-up and feel reconfirmed in the view that America is at war with Islam. It will undercut the U.S., including in Afghanistan and Iraq, far more than Abu Ghraib did. “We can understand torturing prisoners, no matter how repulsive” Newsweek quotes one Pakistani saying, “But insulting the Qur’an is like torturing all Muslims.”

It would be charitable to think that if Newsweek had known how explosive the story was it may have held off until it had more confirmation. If this is true, it is an indication that the media’s widespread failure to pay careful attention to the complexities of religion not only misleads us about domestic and international affairs but also gets people killed.

Much to the chagrin of many of his supporters on the right, President Bush has gone to great lengths to demonstrate America is fighting a war on terrorism in general--and Al Qaeda and Saddam Hussein specifically--and not against Islam. Ironic, isn't it, that one news magazine may have harmed America's reputation in the Middle East far more than our own government.

Punitive liberalism, indeed.

Update: Great point made by a commenter on Ed Morrissey's Captain's Quarters Weblog:

... there is absolutely no legitimate reason to run a story like this. Newsweek ran the story knowing that it would excite the passions of the world's muslim population.

Contrast this with the media's refusal to show pictures of our fellow citizens jumping out the the world trade center. We were told that such pictures would unneccessarily anger the American people and lead to violence against Muslim Americans.

The MSM will show us endless Abu Ghraib pictures, and Newsweek goes so far as to print false stories to inflame muslims against the U.S.

This type of reporting does a disservice not only to the victims of the violence it caused, but also to our Country - one of the few Countries actually committed to religious tolerance and willing to sacrifice our sons and daughters to protect the very freedom that allows religious diversity.