To approach this question, it's worth looking at the entirety of the passage that precedes it:
The stolen and perverted writings of Homer and Ovid, of Plato and Cicero, which all men ought to contemn, are set up by artifice against the Sublime of the Bible; but when the New Age is at leisure to pronounce, all will be set right, and those grand works of the more ancient, and consciously and professedly Inspired men will hold their proper rank, and the Daughters of Memory shall become the Daughters of Inspiration. Shakspeare and Milton were both curb’d by the general malady and infection from the silly Greek and Latin slaves of the sword.
Rouse up, O Young Men of the New Age! Set your foreheads against the ignorant hirelings! For we have hirelings in the Camp, the Court, and the University, who would, if they could, for ever depress mental, and prolong corporeal war. Painters! on you I call. Sculptors! Architects! suffer not the fashionable fools to depress your powers by the prices they pretend to give for contemptible works, or the expensive advertising boasts that they make of such works: believe Christ and His Apostles that there is a class of men whose whole delight is in destroying. We do not want either Greek or Roman models if we are but just and true to our own Imaginations, those Worlds of Eternity in which we shall live for ever, in Jesus our Lord.
Blake contrasts Graeco-Roman ideals to Judaeo-Christian ones. The arts of the classical world are inspired by the muses, i.e., the daughters of Mnemosyne, the Greek personification of memory. Something that relies on memory is by definition a recapitulation, i.e., not new and fresh. Blake seeks to institute radically new art that would be rooted in imagination rather than memory. This imagination would be inspired by the eternal world of Jerusalem. Even though Jerusalem itself is obviously old in a temporal sense, because Christian truth is eternal, it is always radically new. So when Blake says he will not rest
Till we have built Jerusalem
In England's green and pleasant land
it's not so much a rebuilding of something that was once there, as a recapturing of the radical, eternal promise of Christianity.
Blake's own answer to the question he asks in the lines you quote is obviously "yes": England, too, shared God's presence and it too has been, is, and can be Jerusalem. The present state of England is fallen and corrupt, much as Shakespeare's and Milton's poetry is. But even among the Satanic mills of current-day England, Jerusalem lives on eternally.
So what are these satanic mills? In Blake's contemporary context, they're obviously the mills of the Industrial Revolution. But there's also a contrast between these satanic mills and the divine mill; proverbially, God's mill grinds slow but sure.
Against the rapidity of factory life in late 18th C England, Blake posits the slow workings of eternity. Just as God's face once shone on what are now clouded hills, the mills of London obscure what was once Jerusalem. Nevertheless, those mills, being Satanic, are just part of temporality, and mere excrescences on the eternal truth of Christianity.
From this perspective, it makes sense to see the mills as actual mills. I'm sure Blake would agree that the churches of his day were part of the temporal corruption of the eternal truth of Christianity; nevertheless, there's no warrant for saying that the mills are not straightforwardly mills.