There's nothing too unusual here. Apparently the host has instant booking off, or you made a booking request for some other reason1. The host says that actually the dates are unavailable because another guest has extended his stay. If true, the host should have blocked the calendar, but it might not be true and he simply doesn't want to host you. Either way, he's replied "no, it's not available".
As to why the host asked you to cancel, it is likely because the host doesn't want to affect his acceptance rate. Hosts are affected if they do not accept enough requests to book. Host's acceptance rate is a metric important for maintaining superhost status. If you cancel, that doesn't affect the acceptance rate.2 This just might be his habit to curb that problem. On your part, a request has you committed for 24 hours. He could still accept your request and you'd be charged for the stay, then you'd have to depend on the cancellation policy to get your money back. An inquiry leaves you with no commitment.
Just move on and book somewhere else. If you're feeling generous, cancel the request.
Some guests will make requests just to ask for a discount, or to break house rules, like bringing a pet or hosting a party. If this is why you requested, as a host, I'd suggest you take this as a polite "no thank you". I'd further suggest you please stop doing this. It's a little bit rude.
When a host receives a reservation request, he is supposed to accept or decline in the first 24 hours. The acceptance rate is tracked and needs to be above a certain metric. Doing nothing defaults the decline option, and counts against the host's response rate and acceptance rate. Inquiries on the other hand offer the host "pre-approve" and "decline". Neither option is added to any metric, but the response metric still applies. You must have put in a request, not an inquiry, because I don't think you can cancel an inquiry (that wouldn't make sense), and the host can decline an inquiry without penalty.
Footnote: Since I got some static in the comments about the Airbnb policies regarding requests, inquiries, and the host's metrics and when they are affects, here are the relevant support articles from Airbnb.
1. Decline a trip request
2. Respond to an inquiry
3. What are response rate and response time and how are they calculated?
4. Booking inquiries
5. Understanding response rate and acceptance rate Quotes: "A booking request means that the guest is officially asking to book your listing and is waiting for you to accept or decline. As far as your acceptance rate goes, we only measure the final outcome of the booking request, and there are just three possible actions you can take: accept, decline, or let the request time out. If you let a request time out—even if you answer questions but take no action to approve or decline a request within 24 hours—that’s considered a decline." | "if you decline an inquiry, your acceptance rate is not affected" | "low response rates can impact your eligibility for the Superhost program, and acceptance rates can impact eligibility to become a Plus host. And hosts who have very low rates could face penalties, including having their listings paused."