Rushdie, an Indian-born British novelist, has nothing to do with the U.S.-made film Innocence of Muslims, which has sparked violent protests in Muslim countries.
He spent 10 years in hiding after being condemned to death in 1989 by Ayatollah Ruhollah Khomeini, Iran's late leader, over his novel The Satanic Verses, which Khomeini claimed was blasphemous.
Iranian media quoted Hassan Sane'i, a cleric heading the 15 of Khordad Foundation, as saying if Rushdie had been killed the anti-Muslim film Innocence of Muslims would never have been made.
"I am adding another $500,000 to the reward for killing Salman Rushdie, and anyone who carries out this sentence will receive the whole amount immediately," said Sane'i in a statement carried by the Iranian Students' News Agency (ISNA).
The total reward for the author’s death offered by the foundation stands at $3.3 million, with Sanei saying "these days are the most appropriate time to carry it (Rushdie's murder) out."
Khomeini's original fatwa on Rushdie was condemned in the West as incitement to murder and an assault on freedom of speech.
The author came out of hiding in 1999 after Iran's foreign ministry assured Britain that Iran would do nothing to implement the fatwa. In 2005, current supreme leader Ayatollah Ali Khamenei renewed the fatwa, saying Rushdie was considered an apostate whose murder was authorized under Islam.
Rushdie was in Toronto last week at the premiere of Midnight’s Children, Deepa Mehta’s film version of his Booker Prize-winning book. Rushdie’s memoir, Joseph Anton, released this week, tells the story of his life in hiding.
In an interview with BBC, Rushdie said he did not think The Satanic Verses would be published in today's world, because of the “long-term chill” the the book generated. The novel is still banned in India and many Muslims still consider it blasphemous.
He urged publishers to be braver and condemned the nervousness with which they seem to approach controversy.
"The only way of living in a free society is to feel that you have the right to say and do stuff," he said.