Why are some people so prejudiced against people with different religious beliefs and cultural backgrounds to them? (I'm a Caucasian atheist, so I'm not speaking from personal experience but I don't understand why people stereotype religion, etc)

To be prejudice you have to be able to prejudge. The root cause of that is often misinformation given to a person by someone else. Often prejudices are handed down from one generation to another.

Or by making generalizations. Say you meet one person of a particular religion and assume they are all like that? Suppose someone met someone from the KKK, who claim they are Christians, and base their opinion of all Christians on that one person?

To sum it up is ignorance and narrow-mindedness. If people can learn to rationally discuss things and learn to answer questions without be offended that the question was asked, we can all get along better.

The reaction that you describes is not an original idea. It comes from an enemy of the truth. 1John 5:19 says "We know we originate with God, but the whole world is lying in the power of the wicked one. People are easily manipulated by this power, most don't even know he exist. The fact that people the world wide share a common hatred would suggest some influence from somewhere.