Source: The Wrestling Observer Newsletter
Jillian Hall's terrible singing character isn't based off of "American Idol", but rather, Brooke Hogan. The company is using Jillian as retribution to Hulk Hogan for revealing the names under consideration for this year's Hall of Fame over the radio, which infuriated Vince McMahon to say the least. She's now being marketed as that character, so it looks like it's permanent.
Jillian debuted the character at the February 6, 2007 SmackDown tapings in Omaha, NE, a few weeks after Hogan read the HOF candidacy list on the Bubba the Love Sponge show. Jillian had her hair styled after Brooke Hogan. She was also given accented contact lenses to make her eyes the same unusual blue color that Brooke's eyes are.
As it turns out, Stephanie McMahon and Triple H actually came up with the character, not Vince McMahon. Vince simply okayed it because he's currently upset with Hogan. Also, Triple H holds great disdain for Hogan, so this thing shouldn't come off as a surprise.