See also: http://www.answering-islam.org/Responses/Abualrub/terrorism1.htm
Note: The Hadith reference links have been changed to a new source because UCL have removed their hadith collection from public access.
As a side note, this statement is a third party report. We do not have the exact words of Muhammad to evaluate them at this point. Yet there is a narration in Sunan Abu Dawud where Muhammad is directly quoted:
Narrated Rabah ibn Rabi':
When we were with the Apostle of Allah (peace_be_upon_him) on an expedition, he saw some people collected together over something and sent a man and said: See, what are these people collected around? He then came and said: They are round a woman who has been killed. He said: This is not one with whom fighting should have taken place. Khalid ibn al-Walid was in charge of the van; so he sent a man and said: Tell Khalid not to kill a woman or a hired servant. (Sunan Abu Dawud, Book 14, Number 2663)
HOWEVER, there are certain other narrations that permit the killing of women and children, specifically during Muslim raids where they attack unsuspecting victims at night:
Narrated As-Sab bin Jaththama:
The Prophet passed by me at a place called Al-Abwa or Waddan, and was asked whether it was permissible to attack the pagan warriors at night with the probability of exposing their women and children to danger. The Prophet replied, "They (i.e. women and children) are from them (i.e. pagans)." I also heard the Prophet saying, "The institution of Hima is invalid except for Allah and His Apostle." (Sahih Al-Bukhari, Volume 4, Book 52, Number 256)
I.e., they are all the same—both the women and children are nothing more than pagans! The above narration is repeated in several, different hadith collections:
Chapter 9: PERMISSIBILITY OF KILLING WOMEN AND CHILDREN IN THE NIGHT RAIDS, PROVIDED IT IS NOT DELIBERATE
It is reported on the authority of Sa'b b. Jaththama that the Prophet of Allah (may peace be upon him), when asked about the women and children of the polytheists being killed during the night raid, said: They are from them. (Sahih Muslim, Book 019, Number 4321)
Keep in mind that the subheading is not part of the narration, it is added by the collector of the hadiths. In other words, the statement regarding the killing of women and children being permissible as long as it isn’t deliberate is not part of the narration. The hadiths do not explicitly say this, and yet the compiler assumed that this was the clear implication and meaning of these narrations.
It is narrated by Sa'b b. Jaththama that he said (to the Holy Prophet): Messenger of Allah, we kill the children of the polytheists during the night raids. He said: They are from them. (Sahih Muslim, Book 019, Number 4322)
Sa'b b. Jaththama has narrated that the Prophet (may peace be upon him) asked: What about the children of polytheists killed by the cavalry during the night raid? He said: They are from them. (Sahih Muslim, Book 019, Number 4323)
Furthermore, Islamic sources provide many examples where Muslims deliberately and brutally killed women and children. Noted Islamic commentator and historian Al-Tabari mentioned one:
In this year a raiding party led by Zayd b. Harithah set out against Umm Qirfah in the month of Ramadan. During it, Umm Qirfah (Fatimah bt. Rabi‘ah b. Badr) suffered a cruel death. He tied her legs with rope and then tied her between two camels until they split her in two. She was a very old woman.
Her story is as follows. According to Ibn Humayd – Salamah – Ibn Ishaq – ‘Abdallah b. Abi Bakr, who said: The Messenger of God sent Zayd b. Harithah to Wadi al-Qura, where he encountered the Banu Fazarah. Some of his companions were killed there, and Zayd was carried away wounded from among the slain. One of those killed was Ward b. ‘Amr, one of the Banu Sa‘d b. Hudhaym: he was killed by one of the Banu Badr [b. Fazarah]. When Zayd returned, he vowed that no washing [to cleanse him] from impurity should touch his head until he had raided the Fazarah. After he recovered from his wounds, the Messenger of God sent him with an army against the Banu Fazarah. He met them in Wadi al-Qura and inflicted causalities on them. Qays b. al-Musahhar al-Ya‘muri killed Mas‘adah b. Hakamah b. Malik b. Badr and took Umm Qirfah prisoner. (Her name was Fatimah bt. Rabi‘ah b. Badr. She was married to Malik b. Hudhayfah b. Badr. She was a very old woman.) He also took one of Umm Qirfah’ daughters and ‘Abdallah b. Mas‘adah prisoner. Zayd b. Harithah ordered Qays to kill Umm Qirfah, and he killed her cruelly. He tied each of her legs with a rope and tied the ropes to two camels, and they split her in two. Then they brought Umm Qirfah’s daughter and ‘Abdallah b. Mas‘adah to the Messenger of God. Umm Qirfah’s daughter belonged to Salamah b. ‘Amr b. al-Akwa‘, who had taken her - she was a member of a distinguished family among her people: the Arabs used to say, "Had you been more powerful than Umm Qirfah, you could have done no more." The Messenger of God asked Salamah for her, and Salamah gave her to him. He then gave her to his maternal uncle, Hazn b. Abi Wahb and she bore him ‘Abd al-Rahman b. Hazn. (The History of Al-Tabari: The Victory of Islam, translated by Michael Fishbein [State University of New York Press (SUNY), Albany 1997], Volume VIII, pp. 95-97)
Al-Tabari also mentioned that Muhammad had the young boys of the Jewish tribe of Banu Qurayzah beheaded:
The Messenger of God had commanded that all of them who had reached puberty should be killed. (The History of Al-Tabari, Volume VIII, p. 38)
Not only were the young boys of the tribe beheaded, but the Muslims also beheaded one of their women:
According to Ibn Ishaq, the conquest of the Banu Qurayzah took place in the month of Dhu al-Qa‘dah or in the beginning of Dhu al-Hijjah. Al-Waqidi, however, said that the Messenger of God attacked them a few days before the end of Dhu al-Qa‘dah. He asserted that the Messenger of God commanded that furrows should be dug in the ground for the Banu Qurayzah. Then he sat down, and ‘Ali and al-Zubayr began cutting off their heads in his presence. He asserts that the woman whom the Prophet killed that day was named Bunanah, the wife of al-Hakam al-Qurazi- it was she who had killed Khallad b. Suwayd by throwing a milestone on him. The Messenger of God called for her and beheaded her in retaliation for Khallad b. Suwayd. (The History of Al-Tabari, Volume VIII, pp. 40-41)
Narrated Aisha, Ummul Mu'minin:
No woman of Banu Qurayzah was killed except one. She was with me, talking and laughing on her back and belly (extremely), while the Apostle of Allah (peace_be_upon_him) was killing her people with the swords. Suddenly a man called her name: Where is so-and-so? She said: I. I asked: What is the matter with you? She said: I did a new act. She said: The man took her and beheaded her. She said: I will not forget that she was laughing extremely although she knew that she would be killed. (Sunan Abu Dawud, Book 14, Number 2665)
It doesn’t stop here. When Muhammad conquered Mecca he ordered the murder of a couple of singers solely because they had made fun of him in song!
Also among them was ‘Abdallah b. Khatal, a member of the Banu Taym b. Ghalib. The Messenger of God ordered that he should be killed only for the following reason: He was a Muslim, and the Messenger of God sent him to collect alms, sending with him one of the Ansar. With him went a mawla of his, also a Muslim, to serve him. He halted at a resting place and commanded the mawla to slaughter him a goat and make him a meal; then he went to sleep. When he woke up, the mawla had done nothing for him; so he attacked him and killed him. He had two singing girls, Fartana and another with her. The two used to sing satire about the Messenger of God; so the latter commanded that the two of them should be killed along with him…
Also among them were ‘Ikrimah b. Abi Jahl and Sarah, a mawla of one of the sons of ‘Abd al-Muttalib. She was one of those who used to molest the Messenger of God in Mecca…