Issue when converting between multiple data types

It isn't. As Tricky says you have to declare bit_location as a variable, local to the process:

	process( bit_field , msbd , lsb )
			variable	bit_location : natural ;
		begin
			output <= (others => '0') ;
			for i in 0 to 31 loop 
				bit_location := i + to_integer( unsigned(lsb) );
				if (bit_location >= unsigned(lsb)) AND (bit_location <= unsigned(msbd)) then 
					output(i) <= bit_field(bit_location);
				end if;
			end loop;
		end process ;