In Old Testament times, there was a physically identifiable area of land, named Israel, which God promised would be the homeland of the descendants of Abraham, Isaac, and Jacob. The nation of people descended from these men was also named Israel.
Jerusalem existed to be the place where the worship of the One True God took place by way of sacrifice. This sacrifice was not merely the sacrifices of the temple, but more importantly, the sacrifice to end all sacrifice--that of Jesus' crucifixion. The New Jerusalem, foretold in Revelation 21, will likewise be the place where God is worshipped, but this time apart from sacrifice, because Jesus has already been offered as the final and all-sufficient sacrifice. There is also no temple there due to the direct and unveiled presence of God in that place which makes it unnecessary.
Biblically, Israel and Jerusalem are much broader concepts than mere physical locations. Israel, although it had a definable ethnic identity and national borders for a time, was only an initial expression of a much broader reality--the people of God through Christ Jesus, regardless of time or place. Likewise, Jerusalem, although it had, and still has, a specific geographic identity, is merely a shadow of a greater reality—the gathering of God's people to worship Him, both at the temple in the ancient past and around the throne of the Lamb in eternity, and even today as men and women gather to hear God's Word and receive Him through the Sacraments. With Jesus at the center, Israel and the Church, Jerusalem and New Jerusalem, are not contradictions, but the worship of the same Jesus from opposite sides of the cross.