This really depends on who you are talking about. Parzival was written by an author who very likely had never actually spoken to a Muslim or read any Islamic text, and he was perfectly happy to follow the literary convention that indeed stated that there were only Christians, Jews and pagans. On the other hand, while a number of clerical writers apparently didn't understand much about Islam (they frequently thought of it as a Christian heresy), there were sincere efforts to understand it as soon as the church thought it stood a chance of making converts (which was roughly the 12th century). By the early 13th century, the Qur'an had been translated into Latin, but by that time, a largwe body of philosophy from the Islamic world had also been in circulation for quite some time. What is hardest to gauge is the level of contact in closer proximity. It looks as though most clergy kept to themselves rather than interact, but there were instances of conversion. More importantly, a lot of ambitious intellectuals in 11th and 12th-century Europe studied Arabic. We don't really know what they read, but it is hard to believe none of them ever picked up religious texts. And these were not fringe-dwellers, they included a future pope, Gerbert of Aurillac.
Most Europeans outside the Med probably didn't know more about Muslims than that it was another word for blackamoor villains, but there was knowledge if you knew where to look at who to ask.