It’s fairly critical, because it’s the beginning of the split between Avon and Stringer that will play out over the next season and a half.
It arises because Avon, in prison, is unwilling to give up territory in the towers to Prop Joe’s men in exchange for the good dope. Stringer sees that this will be better for business, but Avon is more concerned about the appearance of weakness than just making money. Avon is a warrior, Stringer has become a businessman.
So without Avon’s permission, Stringer makes the deal and lets Prop Joe’s guys sell in a couple of the towers. Avon, in the meantime, hires Brother Mouzone to come down to make sure no east side guys try to get into the towers. Mouzone confronts Cheese (working the towers for Prop Joe with Stringer’s permission) and wounds him with a round of ratshot. Naturally, Prop Joe’s guys have to pull back.
Here’s where it gets complicated. With his deal with Prop Joe about to fall apart, Stringer can’t let it get back to Avon that he made a deal without his permission, so he wants Mouzone out of the way. But no one in his gang, or that he can hire, has a chance of scaring off or killing Mouzone. Omar is the only person strong and daring enough to try.
Stringer arranges the parley with Omar and tells him (falsely) that it was Mouzone who killed and disfigured Omar’s lover (in season 1). Stringer’s nominal motive is to end the bad will between himself and Omar by giving up someone supposedly on his own side. However (and this is my own contribution, not something made explicit in the show) the move can work either of two ways for Stringer. If Omar kills Mouzone, he’s made peace with a bitter enemy and saved the deal with Prop Joe. The best of all possible worlds. If Mouzone kills Omar, at least Omar’s out of Stringer’s way. Not quite as good as plan A, since he still has to do something about Mouzone, but net positive.
What Stringer couldn’t have counted on is exactly what happens: Omar realizes he’s been played before Mouzone is finished off. Naturally, Mouzone figures it out, too, hence the tense scene between him and Stringer in the hospital.
This is the worst possible outcome for Stringer, because now the two most fearsome guys in the world of The Wire are both really pissed at him. And we know how that will turn out.
The only bright side for Stringer (temporarily) is that, since Mouzone has pulled out, Avon must reluctantly agree to share the towers with Prop Joe, not realizing that that’s what had been going on for weeks already.
I hope this helps (and that I’ve gotten it right myself!).