I.
Whatever has reached us of the books that were sent down to the nations who came before us, our attitude towards it – according to what our religious texts dictate – is threefold:
i. That which we know is true because some of our religious texts testify that it is true.
An example of that is the hadith to which you refer in your question, in which the Prophet (blessings and peace of Allah be upon him) affirmed what the rabbi said.
It was narrated that `Abdullah (may Allah be pleased with him) said: A Jewish rabbi came and said that on the Day of Resurrection, Allah will place the heavens on one finger, the earths on one finger, water and soil on one finger, and all creatures on one finger, then He will shake them and say: I am the Sovereign, I am the Sovereign. And I saw the Prophet (blessings and peace of Allah be upon him) smile so broadly that his eyeteeth appeared, liking and affirming what [the rabbi] said. Then the Prophet (blessings and peace of Allah be upon him) said: {They have not given due recognition to Allah} [Al-An`am 6:91] until he reached the word {They have not given due recognition to Allah. On the Day of Resurrection, the entire earth will be in His grip, and the heavens will be rolled up in His Right Hand. Glorified and exalted be Allah far above the partners they ascribe to Him!} [Al-Zumar 39:67].
Narrated by al-Bukhari, 7513; and Muslim, 2786.
Another example of that is the hadith of `Abdullah ibn `Umar (may Allah be pleased with them both), according to which the Jews brought to the Prophet (blessings and peace of Allah be upon him) a man and woman of their community who had committed zina. He said to them: “What do you usually do to the one among you who has committed zina?” They said: We blacken their faces with coal and beat them. He said: “Do you not find the command to stone them to death in the Torah?” They said: We do not find anything of that nature in it. `Abdullah ibn Salam said to them. You are lying! Bring the Torah and recite it if you are telling the truth. [So they brought it] and their teacher who used to teach it to them placed his hand over the verse of stoning and began to recite what was written above and below the place hidden with his hand, but he did not recite the verse of stoning. `Abdullah bin Salam lifted his hand from the verse of stoning and said: What is this? When the Jews saw that verse, they said: This is the verse of stoning. So the Prophet (blessings and peace of Allah be upon him) ordered the two adulterers to be stoned to death, and they were stoned to death near the place where biers used to be placed near the mosque. And I saw her companion [the adulterer] shielding her with his body from the stones.
Narrated by al-Bukhari, 4556; and Muslim, 1699.
Whatever our religious texts affirm that it is in the Torah, it is permissible for us to say that it is some of the truth that remained in the previous books and was not distorted, if we know that it is still to be found in their books today. Otherwise, they may have distorted it and hidden it after Islam came, by way of deception and to confuse people.
ii. What we know to be false on the basis of what we have in our religious texts (the Quran and Sunnah) that is contrary to it. This is false and is to be rejected, such as their lies about the prophets, and so on.
iii. As for that which we do not know whether it is true or false, we refrain from passing judgement on it, and we neither believe in it nor disbelieve in it, but it is permissible to narrate it by way of elaborating upon a point. This is what is meant by the words of the Prophet (blessings and peace of Allah be upon him): “Do not believe the People of the Book and do not disbelieve them; rather say: We believe in Allah and what He has sent down to us.” Narrated by al-Bukhari, 4215.
Ibn Kathir (may Allah have mercy on him) said:
Their reports are of three types:
Those which we know to be true, based on evidence in the Book of Allah and the Sunnah of His Messenger.
Those which we know to be false, because there is evidence to the contrary in the Quran and Sunnah.
Those concerning which there is no evidence in our religious texts to confirm whether they are true or false. These are the texts which it is permissible to quote, because the Prophet (blessings and peace of Allah be upon him) said: “Narrate from the Children of Israel and there is no problem.” These are the texts that are to be neither believed nor disbelieved, because he said: “Do not believe them and do not disbelieve them.”
End quote from Tafsir Ibn Kathir, 3/528.
II.
The Prophet’s permission to narrate from the Children of Israel has to do with that which does not contradict what is soundly narrated in our own religious texts (the Quran and Sunnah), so as to reassure the Muslim that there is no problem with that.
It was narrated from `Abdullah ibn `Amr that the Prophet (blessings and peace of Allah be upon him) said: “Convey from me, even if it is one verse, and narrate from the Children of Israel and there is no problem. But whoever tells a lie about me deliberately, let him take his place in Hell.” Narrated by al-Bukhari, 3274.
This permission is not to be resorted to if there are any reservations about a text; in that case, the right thing to do is to refrain from quoting it.
Al-Baydawi (may Allah have mercy on him) said:
If someone were to say: Do this, and there is no problem, this is ordinarily taken to mean that it is permissible and may be done without feeling any unease, as may be understood from his words, “Are you uncertain?” and the like.
But it is only permissible to narrate from them if we do not think that what they say is a lie based on certain knowledge or speculation, because the Prophet (blessings and peace of Allah be upon him) said: <
End quote from Tuhfat al-Abrar Sharh Masabih as-Sunnah, 1/146.
If there are any reservations or fears of causing confusion by quoting from them, then it is more appropriate to avoid doing that, and the senior Sahabah warned against that.
It was narrated that Ibn `Abbas (may Allah be pleased with him) said: O Muslims, how can you ask the People of the Book about anything while your Book (the Quran), which has been sent down to His Prophet (blessings and peace of Allah be upon him) is the most recent message from Allah? You read it pure and undistorted, and Allah has told you that the People of the Book (Jews and Christians) changed what Allah wrote and distorted it with their own hands, saying ‘It is from Allah,’ in order to trade it for a small price. Doesn’t the knowledge which has come to you prevent you from asking them about anything? No, by Allah, we have never seen any man among them asking you regarding what has been revealed to you!
Narrated by al-Bukhari from Ibn `Abbas in a mawqoof report [meaning that the chain of narration does not go back to the Prophet (blessings and peace of Allah be upon him)].
And `Abdullah ibn Mas`ood said: Do not ask the People of the Book about anything, lest you disbelieve something that is true or believe something that is false, for they will never guide you when they themselves are misguided. Each of them is attached to his religion as the newborn camel is attached to its mother.
Narrated by Ibn Abi Shaybah in his Musannaf, 28115; classed as authentic (sahih) by the commentators on Sa`d ash-Shathri.
And Allah knows best.