Perhaps one of the most challenging tasks a writer faces is adapting a traditional story for a children's book. To make things even more complicated, the problems aren't necessarily the same for each writer.
For example, when I wrote Prince Jonathan's War I faced a number of problems. One of the biggest ones was how to handle the violence. Often traditional stories involve very adult topics that make modern adults squeamish. Finding a comfortable way to deal with what some adults deem "inappropriate content" may force you to change the story somewhat... and those changes may not allow you to tell the story as it was meant to be heard.
I should point out that children often don't have a problem with the things that bother adults. Sometimes they understand more about what's going on than we adults give them credit for. And don't ignore the fact that the fairy tales they've grown up hearing typically involve adult situations that we don't notice because we're so familiar with the stories. (If nothing else, the kids have learned more from TV than we realize.) In Prince Jonathan's War I sidestepped some of the bloodshed by simply not dwelling on it. Even children who don't understand death know that people get hurt badly in a war -- especially a war involving swords -- so I felt it was enough to let them know there was a war going on and show sword fights in the pictures.
Likewise, your religious beliefs can affect how you retell stories from your religious tradition; the same is often true for writers retelling stories from their personal or "tribal" history, or for writers who want to retell an event well-known from history. The problem is how to "fictionalize" the scenes. For me as a Christian, that makes retelling Bible stories a little tricky. Rarely is a religious story written with drama in mind -- it's written as history or as a teaching tool, or both. You have to imagine what may have happened when you turn it into a children's book, and you have to decide how much freedom you can exercise and still be true to the story. (Writers retelling stories that they don't have such a connection with often make major changes to the story without any qualms at all.)
It can be especially difficult when you're doing an easy reader because of the simplified language you need to use. Some concepts are just hard to put in simple words. I substituted the words "holy man" for "priest" in Prince Jonathan's War, as well as in the as-yet-unpublished Japanese legend I've done, simply because the pronunciation of the "ie" in priest might confuse young readers in the age group the book is meant for. (Most of those kids learn to sound out the "ie" as a long i sound, not a long e.) But I felt that was a reasonable substitution; such a convenient change isn't always available to a writer.
As a writer you have to consider these things when you choose to retell an existing story. And you should consider them before you actually commit to writing the story; your uncertainty concerning how to handle them can sidetrack your work very quickly. So how should you approach this problem?
My own guideline is to balance passion and comfort. First I anticipate possible problems. How do I plan to deal with the difficulties? If I don't feel good about the solutions I come up with, I shelve the project for the time being. If I feel passionate enough about it, my mind will continue to "try things" to make the story work even though I'm focusing on new projects. If something plausible comes to mind, I'll take a little time to make a test run and see if it works. But I need the balance -- I don't want to write things unless I really like them, and I don't want to force things when I'm passionate about them but am displeased with the actual results.
Oh, and save all the attempts you make to get the story on paper. If the story simply won't let you go, occasionally go back and re-read all of them. You never know when the key to figuring things out will come from an early draft that you didn't really like. Sometimes the solution lies in using ideas from two or three different drafts!