Google seems embarrassed by this, and has its own advertising on the right hand side of the page called Offensive Search Results to explain how this happened.
This page then has a link to an excellent article at the Jewish World Review.
My explanation of why the word "Jew" is offensive is as follows:
I think that if you call somebody Jewish, you're describing one of their attributes. If you call them a Jew, you are implying that they are completely described by that one attribute, ignoring all others. It's like me being called a "Brit" rather than "British" - British is one of my attributes, but I'm also a Father, Husband, Computer Programmer, Photographer, Movie Goer, Cyclist, etc.