I would take that step.
I would feel like shit, and probably totally lose my faith in the ability of the human race to fix its problems (hell, I'm halfway there already...) but you don't see me calling for Theocide from the starting line.
Your "friend" has forgotten something. This is not a religious war - this is a power struggle, that has taken on religious trappings. If we go after the whole religion, turn against all Muslims, then Bin Laden achieves his goals, in uniting the entire Muslim world against the "West," such as it is.
Translation: We just made a shitload more enemies.
And if you've been reading what I wrote, it's not about taking out all the Muslims, it's about taking out WHATEVER group happens to take actions against civilians, and not choosing the lesser of two evils, even if it costs us in the short run. This "He's more of a monster than you are, so I'll back you" bullshit is what gets us into this - and unless we do some MAJOR fucking housecleaning, our own house is going to fall in on our heads. Maybe not this time, but the next Bin Laden wannabe, whether he be Moonie, Sikh, or Christian, he'll figure out some way to make 9/11/2001 look like a firecracker.
All you're doing is making it so that monsters like him can rise up again. The lenerean hydra kept coming back because every time you cut off a head, two grew back. But if you burn that thing, EVEN IF IT BURNS YOU, it won't be coming back. Considering that this hydra has roots in us, we need to burn ourselves as well as Bin Laden.