To create a project from existing source, you should be able to use the "New Grails Project" or "New Grails Plugin Project" wizard.
If you point this wizard to file system location where there is already a grails project it will create and setup an eclipse project with the contents of this folder.
The "Convert to Grails Project" has been buggy. The problem with it is that depending on what is "broken" with a user's project a different fix may be needed. In other words, it is not easy to know whether we really cover all possible ways in which a user's config files may be broken.
Very recently I fixed a bug in this code that made it break if the project didn't have Java nature to start with. To get this fix, you'd need to update from the nightly update site (it isn't in the 2.5.0 yet, but will be in 2.5.1.
It would actually be great if you could try this out and if it isn't fixing your problem, we should look into it more (perhaps it presents another opportunity to make this command better at fixing issues with project setup).
After you update to the nightly update site, I suggest you try to "Convert to Grails Project" again and see what happens.
Kris De Volder -- SpringSource