As the theory goes...they found out he was Jewish...visited Israel...assumed he was a double agent for Mossad.
http://www.israelnewsagency.com/pearlisrael.html
''My name is Daniel Pearl. I'm a Jewish American from ... Encinco, California, USA. I come from, on my father's side, a family of Zionists. My father is Jewish. My mother is Jewish. I'm Jewish. My family follows Judaism. We've made numerous family visits to Israel.''