I am no scholar but...
I believe a combination of factors were at work. First of all there were internal factors, combined with external invasions. You had the Christian Crusades, then Ghengis Kahn, then Tamerlane and a resurgance of European power. Internally you had decadence and the growing ignorance of what the Koran said due to the fact that Arabic became less and less known to the general public. Judging by [link|http://users.erols.com/zenithco/decline1.htm|this lecture] on the topic, those combined with the internal decadence were the main problems that they see. (Incidentally that lecture contains a wonderful description of what the Arabic world was like at its height.)
However you then had several external factors that aren't so visible. First you had the great European voyages of discovery. Prior to those, the primary trading routes to the East went along the Great Silk Route, enrichening Islamic peoples on the way. But as it became cheaper for Europe to trade directly around the world, trade moved away from the expensive overland routes leading to an economic decline.
A second factor is a change in what you compare it to. An enlightened and prosperous society by the standards of 1000 AD is not so enlightened or prosperous by the standards of 1700, and it is downright downtrodden by the standards of 2000.
A third factor was Napoleon. From the Crusades to Napoleon, European military abilities progressed tremendously, but Europe continued to think of the Islamic world as much better than them militarily. Then Napoleon conquered Egypt without trouble and Europe realized how much things had changed. Very shortly thereafter you find European countries bullying the Islamic world pretty much at will. (Hence the famous comment about how sick the Ottoman Empire was - by size it was a great power, but even minor European countries were more powerful.)
Then we discovered the value of oil, and began playing games of realpolitik with their governments.
Cheers,
Ben
