At the time (and we're talking 1998 here), I didn't find Jerusalem particularly dangerous, although I was there in a relatively quiet time and things have obviously changed. The mixture of nationalities and religions here is much more diverse than it is in, say, Tel Aviv - to me the Old City appeared less vulnerable to attacks anyway...
One thing is to watch your belongings, especially in the Old Town, as pickpockets are everywhere.
Keep your money well hidden at all times, especially in the Old City market. There are pickpockets. If your hostel or hotel has a safe leave your valuables there, although I prefer to keep my passport hidden in my money belt. The culprits are more often fellow travellers I am sorry to say and selling foriegn passports ( especially US, British and European,) was big business when I was there.
WARNING; be especially vigilant on the Mount of Olives as pickpockets are around here. Also women are advised not to walk here alone or to walk the city ramparts on their own. Incidents are rare and I only experienced one such unpleasantness in the three months I lived here. ( My own fault as I was alone, late at night, rather drunk, on my way back to my hostel when I got followed home, with some minor verbal abuse.) but take precautions and you will take only pleasant memories home with you.
Being a major area to visit by 3 of the Major Religions of the world, Jerusalem has it's share of scammers, touts, pick pockets, hustlers and more. walking especially at the old city has lots of crowds and some of them are these unholy people so your best bet will be to secure your valuables into bags or back packs that are slash proof (i'm using pacsafe products) or put your wallet in front pocket of your jeans instead of the back.