What is hulool
Shortly one could say hulool الحلول is incarnation. It means that one thing is absorbed or incarnated in an other thing by a complete mixing. It's usually an expression used by those who pretend that Allah may incarnate in one of his creations and be unified with it. (See also this fatwa in Arabic)
This is one of the esoteric terms of 'aqidah that are mostly used by sufis. You may also find
... Hulool and ittihaad الاتحاد (union with the divine) – which includes the term wahdat al-wujood وحدة الوجود (“unity of being”). (Taken from the following fatwa/source)
Here some more details from this fatwa:
Al-Jarjaani (may Allah have mercy on him) said:
Complete hulool is the union of two bodies in such a way that pointing to one is also pointing to the other, such as the juice in an orange.
Incomplete hulool is when one of the two entities acts as a vessel containing the other, such as water in a jug. (At-Ta‘reefaat, p. 92.)
This is what is meant by hulool: affirmation of two entities, one of which is present in the other.
What is meant by this word as used by Sufis and others is the incarnation or presence of Allah – may He be glorified and exalted – in His creation or in some of His creation.
Hulool may be divided into two types:
- General hulool, which is the belief that Allah, may He be exalted, is present in all things.
But this hulool is similar to the idea of the incarnation of the divine (i.e., the Creator God) in the human (i.e., the created being), whilst affirming that the two entities are distinct and separate; in other words, He is not unified with the one in whom He is present, rather He is everywhere yet separate. Thus this is confirmation of two separate entities.
- Specific hulool, which is the belief that Allah – may He be glorified and exalted – is present in some of His creation, whilst believing that there is a Creator and a created being.
Hulool and ibn 'Arabi
First of all note that ibn 'Arabi ابن عربي is not ibn al-'Arabi أبو بكر بن العربي the maliki fiqh, hadith and tafsir scholar. But ibn 'Arabi was a dhahiri so through him the knowledge and books of ibn Hazm a-dhahiri was spread in the middle east. Both are borne in al-Andalus but there's at least one century time difference between both of them.
Ibn 'Arabi rejected both hulool and itihad saying:
من قال بالحلول فدينه معلول، وما قال بالاتحاد إلا أهل الإلحاد
which means: Who affirmed hulool (incarnation) his religion is unhealthy (ill), and none affirmed al-Itihaad (unity or uniffication) expect the apostates.
Note that the Arabic Wikipedia site on him seems to emphasize that only ibn Khaldun and ibn Zor'ah al-'Iraqi declared him as kafir etc.. While scholars like a-Dhahbi, al-Manawi and ibn Taymiyyah mostly didn't give much comments on him or just quoted him or quoted what others said about him without any own annotation.
The statement of ibn 'Arabi
His full statement is:
العبد رب والرب عبد يا ليت شعري من المكلف
This is an indication to what one could conclude from the sahih hadith.
The more one gets close to Allah by doing ordered worships first and adding the more and more of optional worships and good deeds the more one gets a level where one is worshiping Allah as if one could see him and he would be guided by Allah in his actions (for details read this fatwa).
So yes if taken literally the verse seems clearly indicating kufr, but (maybe) one must look behind the letters and words to understand the meaning.