The phrase "literary London" is usually employed to nebulous effect but it accurately describes the gathering that took place at the Greek Orthodox church in Bayswater on 14 February, a clear blue St Valentine's Day, in 1989. The occasion was Bruce Chatwin's memorial service, and it was attended by a large contingent of what was and remains an exceptional generation of British or British-based writers. Among them were Martin Amis, Paul Theroux and Salman Rushdie.

According to Theroux, Chatwin's funeral "was the high watermark of that decade's creative activity". For Amis, Chatwin, a recent convert to Greek Orthodoxy, had played a last joke on his friends by subjecting them to "a religion that no one he knew could understand or respond to". If so, it was a joke destined to be overshadowed by a very different kind of theological offering that was far more of a challenge to understand or respond to. That same morning Rushdie had been informed of the fatwa issued by the Iranian leader, Ayatollah Ruhollah Khomeini, calling for his execution for the crime of writing a novel, The Satanic Verses.

Word of the death sentence had spread among the mourners. Thinking the fatwa was little more than the empty threat of a faraway tyrant, Theroux called out to Rushdie: "Next week we'll be back here for you!" But Khomeini's pronouncements in such matters were seldom without consequence. As far back as 1947, when merely a cleric, he had ordered the death of an Iranian education minister who within days was shot dead. And thereafter countless other political and intellectual opponents were to lose their lives on Khomeini's command. Chatwin's memorial service was to be Rushdie's last public appearance for some time.

He spent the remainder of that day searching for his son, Zafar, then he went into hiding. The headline of the London evening paper read: EXECUTE RUSHDIE, ORDERS THE AYATOLLAH. "Salman had disappeared into the world of block caps," wrote Amis. "He had vanished into the front page." In fact he had moved with a Special Branch protection team to the Lygon Arms hotel in the Cotswolds. Apparently a tabloid reporter happened to be in the next room, conducting an adulterous affair, and missed the biggest story of the year. That same evening Channel 4 broadcast a pre-recorded interview with Rushdie on The Bandung File. "It's very simple in this country," said the author, when asked about the demands that his book be withdrawn from shops. "If you don't want to read a book, you don't have to read it. It's very hard to be offended by The Satanic Verses - it requires a long period of intense reading. It's a quarter of a million words."

Four days after Rushdie received his "unfunny Valentine", he issued an apology: "I profoundly regret the distress that publication has occasioned to sincere followers of Islam." At first the apology was rejected then accepted in Iran, before Khomeini stated that even if Rushdie repented and "became the most pious man of all time" it was still incumbent on every Muslim to "employ everything he has got" to kill him. So much for the spirit of forgiveness.

What the mixed responses pointed to was that, right from the start, The Satanic Verses affair was less a theological dispute than an opportunity to exert political leverage. The background to the controversy was the struggle between Saudi Arabia and Iran to be the standard bearer of global Islam. The Saudis had spent a great deal of money exporting the fundamentalist or Salafi version of Sunni Islam, while Shiite Iran, still smarting from a calamitous war and humiliating armistice with Iraq, was keen to reassert its credentials as the vanguard of the Islamic revolution. Both the Saudis and Iranians saw a new constituency, ripe for exploitation, in the small British protest groups that initially responded to The Satanic Verses with book-burning demonstrations. But in fact the protesters who took to the streets in Bradford and other mill towns were themselves the offspring of other far-off theocratic politics in the subcontinent.

The Satanic Verses was published on 26 September 1988 and, after pressure from the Janata party, banned in India by Rajiv Gandhi's government nine days later. Flushed with this success, Indians working for the Saudi-financed Islamic Foundation of Leicester suggested trying to get the book banned in Britain. According to Malise Ruthven, author of A Satanic Affair, the campaign was then orchestrated by Jamaat-i-Islami, the party founded in Pakistan by Sayyid Abul A'la Maududi. A journalist-cum-theologian, Maududi preached that "for the entire human race, there is only one way of life which is Right in the eyes of God and that is al-Islam".

Nevertheless it was the Saudis who funded the United Kingdom Action Committee on Islamic Affairs, the protest body set up to maximise pressure on The Satanic Verses. It featured Islamists like Iqbal Sacranie, the future head of the Muslim Council of Britain. (Sacranie famously opined that "death, perhaps, is a bit too easy" for Rushdie. He was later knighted for services to community relations.) And it was the Saudi clerics who were planning a trial of Rushdie in absentia.

In keeping with most Muslim countries, Iran did not ban The Satanic Verses. It was even reviewed in an Iranian newspaper. But noticing the protests in India and Britain, a delegation of mullahs from the holy city of Qum read a section of the book to Khomeini, including the part featuring a mad imam in exile, which was an obvious caricature of Khomeini. As one British diplomat in Iran said: "It was designed to send the old boy incandescent." So it was that the Iranians delivered the fatwa, thus winning the competition to be the greatest haters of Rushdie, and therefore the West, and all that entailed.

As Khomeini put it in a speech nine days after the fatwa, The Satanic Verses was very important to what he called the "world devourers" because they had mobilised the "entire Zionism and arrogance behind it". The book, he went on, was a "calculated" attack by "colonialism" on the greatness and honour of the clergy. It's worth noting here that the book, written by an arch anti-colonialist, was indeed in part an attack, or at least satire, on the role of the clergy, the caste of priests that has no Qur'anic authority. In this newspaper, just before the fatwa, Rushdie had written: "A powerful tribe of clerics has taken over Islam. These are the contemporary Thought Police."

The next decade was a dangerous and isolating time for Rushdie. He was shadowed round-the-clock by bodyguards, and moved each time the security services became aware of one of the series of plots to kill him. Because there were British hostages held by Islamic extremists in Lebanon, Rushdie was advised by the authorities not to say or do anything that might antagonise their captors. Politicians remained at a safe public distance from him. Travel, once the driver of his imagination, had become a logistical and administrative nightmare. The subcontinent was ruled out. British Airways told him not to fly with them because it might endanger their staff. And when he did manage to go abroad, staying with friends was a cramped affair. As Christopher Hitchens, an old friend and staunch advocate, recently recalled of a Rushdie visit to Washington DC: "When he was staying at my house back at Thanksgiving of 1993, so were about a dozen heavily armed members of the United States's finest anti-terrorist forces." In contemplating these sorts of details, it's hard to keep in mind that the person at the centre of them was just a writer. "I said somewhere," he told me last year, "that it was like a bad Salman Rushdie novel."

The years following the fatwa were also a damaging and sometimes lethal period for many of those associated with The Satanic Verses, few of whom had any protection. In April 1989 Collets, the left-wing bookshop, and Dillons were firebombed for stocking the Rushdie novel. A month later there were explosions in High Wycombe and London's King's Road. There was a bomb in the Liberty department store which housed a Penguin Bookshop (Penguin was the publisher of The Satanic Verses) and at the York Penguin bookshop. Unexploded devices were also discovered at the Nottingham, Guildford and Peterborough branches of the store.

In August the same year Mustafa Mahmoud Mazeh accidentally blew himself up in a Paddington hotel room while priming a bomb intended to kill Rushdie. Meanwhile Rushdie's marriage to the American author Marianne Wiggins did not long survive the pressures of life in hiding. Rushdie was at a low ebb and writing very little. Amis wrote: "I often tell him that if the Rushdie Affair were, for instance, the Amis Affair, then I would, by now, be a tearful and tranquillised 300-pounder, with no eyelashes or nostril hairs, and covered in blotches and burns from various misadventures with the syringe and the crackpipe."

Rushdie sought another way out. On Christmas Eve 1990 he issued a statement bearing witness that "there is no God but Allah, and Muhammad is his last prophet". Claiming to have renewed his faith in Islam, he said he did not agree with any character in The Satanic Verses who "casts aspersions... upon the authenticity of the holy Qur'an, or who rejects the divinity of Allah". He also said he would not release a paperback of the book. That evening he was so disgusted with himself that he was physically sick. The playwright Arnold Wesker, a Rushdie supporter, said: "The religious terrorists have won." Hitchens recalls: "I told Salman that it didn't make any difference to my support for him but that I didn't think it would 'work' and that I didn't think it was dignified. I think he felt much better after he re-apostasised: it was a sort of Gethsemane - if you will forgive the expression - after which he was determined to see the whole thing through." Years later Rushdie would publicly say it was the biggest mistake of his life, a "deranged" moment when he had hit rock bottom. In the event, it made no difference. Though Khomeini was now dead, the Iranian clergy confirmed that Rushdie still had to be killed. The following year Hitoshi Igarashi, Rushdie's Japanese translator, was stabbed to death and Ettore Capriolo, the Italian translator, seriously injured in another knife attack. In 1993 William Nygaard, the publisher in Norway, was shot and injured, and Aziz Nesin, the Turkish translator, was the target of the Silvas massacre in Turkey that left 37 dead in an arson attack on a hotel.

For years the novel was withdrawn from display in shops around the world but it still became a bestseller in several countries, including America, and was published, despite all the demands and threats, in paperback. Moreover, Rushdie has gone on to enjoy a successful career, writing seven more novels and several other books, and he has also attained a measure of normalised liberty since the Iranian government effectively withdrew its backing from the fatwa in 1998. To this extent, Khomeini's edict and the murderous campaign it engendered failed abysmally. But Rushdie and The Satanic Verses, it should be remembered, was not the only target of the fatwa. In his original statement, broadcast on Iranian radio, Khomeini not only called for the death of all those consciously associated with the book but also said they should be executed "so that no one will dare to insult the Islamic sanctity". In this respect, and several others, Khomeini's terror has proved far more effective.

Who would dare to write a book like The Satanic Verses nowadays? And if some brave or reckless author did dare, who would publish it? The signs in both cases are that no such writer or publisher is likely to appear, and for two reasons. The first and most obvious is fear. The Satanic Verses is a rich and complex literary novel, by turns ironic, fantastical and satirical. Despite what is often said, mostly by those who haven't read it, the book does not take direct aim at Islam or its prophet. Those sections that have caused the greatest controversy are contained within the dreams or nightmares of a character who is in the grip of psychosis. Which is to say that, even buried in the fevered subconscious of a disturbed character inside a work of fiction - a work of magical realism fiction! - there is no escape from literalist tyranny. Any sentence might turn out to be a death sentence. And few if any of even the boldest and most iconoclastic artists wish to run that risk.

The recent case of The Jewel of Medina, a work by Sherry Jones which is neither bold nor iconoclastic, exemplifies the problem. In 2007 the American publishers Random House bought the rights to this historical novel about the prophet Muhammad's wife Aisha. By all accounts the book is something of a cheesy romance. Jones herself believes it is a circumspect fiction which "portrays the prophet Muhammad as a gentle, compassionate, wise leader and man respectful toward women and his wives". But a professor of Middle Eastern studies named Denise Spellberg advised Random House that it might provoke violence. The publishers duly cancelled the publication.

"We stand firmly by our responsibility to support our authors and the free discussion of ideas, even those that may be construed as offensive by some," Random House explained in a statement. "However, a publisher must weigh that responsibility against others that it also bears, and in this instance we decided, after much deliberation, to postpone publication for the safety of the author, employees of Random House, booksellers and anyone who would be involved in distribution and sale of the novel."

This has become a familiar conceit in recent years: we defend the right of freedom of expression but prefer not to exercise it in situations that might endanger us. Random House publish Rushdie, and he was angered by what he saw as a capitulation to the threat of Islamic reprisals. "This is censorship by fear, and it sets a very bad precedent indeed," he said.

In Britain the book was taken up by the independent publisher, Gibson Square. But on 27 September last year the London home of Martin Rynja, Gibson Square's publisher, was firebombed. As things stand, the book's British publication is indefinitely postponed.

Nor is this self-censorship restricted to literature. Ramin Gray, associate director of the Royal Court Theatre, recently admitted that he would be reluctant to stage a play that was critical of Islam. "You would think twice," he said. "You'd have to take the play on its merits but given the time we're in, it's very hard because you'd worry that if you cause offence then the whole enterprise would become buried in a sea of controversy. It does make you tread carefully."

The Royal Court cancelled a new version of Aristophanes's Lysistrata last year because the play is set in Muslim paradise. The Barbican cut out sections of Tamburlaine the Great for similar reasons, and in 2006 Berlin's Deutsche Oper dropped a production of Mozart's Idomeneo because it depicted Muhammad. In 2005 Tate Britain removed God is Great, John Latham's sculpture featuring copies of a Bible, a Qur'an and a Talmud, because, according to a gallery statement, it was not "appropriate" in the sensitive post-7/7 climate. As Kenan Malik, author of the forthcoming book From Fatwa to Jihad: The Rushdie Affair and Its Legacy, has written: "The fatwa has in effect become internalised".

Fear is not the only explanation why a global religion which, rightly or wrongly, is invoked as the inspiration for terror has become a non-subject for critical (or uncritical) works of art. The other reason is sympathy. And here Khomeini has proved prescient. Back in 1989, only the most conspiracy-minded Islamists took seriously Khomeini's claims that The Satanic Verses was part of a Zionist-imperialist plot to persecute Muslims.

The world has since changed. Following the events of 11 September 2001, the invasion of Afghanistan and Iraq, Guantanamo Bay and the ongoing conflict between Israel and the Palestinians, the idea that the West is engaged in a military and cultural war with Islam is now far more widely entertained. A conflation has taken place in which the war in Iraq and the plight of the Palestinians has become somehow indivisible from the situation of Muslims in Britain. So that to be opposed to the war is to be, if not actively in favour of Islamism at home (the position of much of the far left), then at least not against it. And by extension, open criticism of Islamism, religious censorship and violence is often automatically viewed as an expression of "neocon" or "imperialist" politics.

Although there were exceptions at the time - among them Germaine Greer, John Berger and John Le Carré - many prominent cultural figures on the left extended Rushdie their support both here and abroad. Even a critic of The Satanic Verses, the Egyptian novelist and Nobel laureate Naguib Mahfouz, who felt the book was insulting to Islam, signed a petition stating that "no blasphemy harms Islam and Muslims so much as the call for murdering a writer". Five years later Mahfouz was stabbed in the neck by Islamic extremists.

In the years since the fatwa there have been many more flashpoints in which artists and writers have been threatened, attacked or killed for criticising Islam, and not all have been Muslims. Hitchens thinks this is a development that has been overlooked. "Salman was raised as a Muslim," he says, "so in theory he's within the jurisdiction. He can be sentenced as an apostate, and the same can be done to Ayaan Hirsi Ali and Taslima Nasreen [the Bangladeshi novelist under threat of decapitation who has just been offered refuge in Paris]. But what people haven't noticed sufficiently is that now people who are not Muslims, like the Danish cartoonists, have been threatened with violence for criticising Islam. That's sort of new, and ought to be more controversial than it is."

Yet few of those who have found themselves targeted by Islamic extremists in the wake of the Rushdie fatwa received wholehearted support from the liberal community. Quite the opposite. Theo Van Gogh, slaughtered on a busy street in Amsterdam; his co-filmmaker Ayaan Hirsi Ali, threatened with death and placed under police protection; the Danish cartoonists who responded to Jyllands-Posten's commission to draw the prophet Muhammad and were forced into hiding: in each of these high-profile cases, the victims of intimidation were castigated and shunned by a wide swathe of progressive opinion.

"Right wing", "provocateurs", "reactionaries" and "racist" are some of the more restrained epithets aimed at the above names by their liberal critics. (Incidentally, surely the defining example of the absurdity of self-censorship is that the Danish cartoon that did not feature an image of the prophet but instead the legend "Jyllands-Posten's journalists are a bunch of reactionary provocateurs" was also deemed too dangerous to publish by every newspaper in Britain.)

The word, though, that is most frequently launched at the heirs of Rushdie is Islamophobic. Almost any criticism of Islam or any of its adherents is likely to trigger accusations of Islamophobia. For example, in 2007 the Channel 4 documentary Undercover Mosque exposed various preachers making hateful and violent statements regarding women, Jews, homosexuals and infidels. By any journalistic measure it was a compelling and revelatory documentary. But in the media storm that followed it was not the inflammatory preachers but the programme-makers who found themselves subject to an inquisition. The police tried to prosecute them for broadcasting "material likely to stir up racial hatred". And when that failed they referred the film to Ofcom for censure. It took nine months before the film-makers were fully vindicated and their professional reputations restored.

Of course, very few people sympathised with the preachers shown in the documentary but many did want to express their sympathy with Muslims in general, whom they saw, not without reason, as an embattled minority. And to the well-intentioned, the best way of doing this was to condemn anyone who criticised any Muslim, regardless of their extremism. As the playwright David Edgar put it: "Whether they like it or not, the current defectors [his term for those liberals who criticise extremist Islamic leaders] are seeking to provide a vocabulary for the progressive intelligentsia to abandon the poor."

Muslims in all their myriad variety and differences have morphed, or been corralled, into a unitary socio-economic-cultural block. To take vocal exception to one aspect of Islam or one particular leader or sect is, almost by definition, to be an opponent of all Muslims. The Satanic Verses affair was the first test case in Britain of Muslimhood - many were to follow - in which the mark of a true Muslim was to be in favour of banning the novel, and the distinction of an even truer Muslim was to be in favour of killing Rushdie. Inayat Bunglawala, spokesperson for the Jamaat-i-Islami-influenced Muslim Council of Britain, probably the most-often cited Islamic organisation in the country, passed both tests with flying colours. He was, in his own words, "elated" when Khomeini delivered the fatwa. "It was a very welcome reminder that British Muslims did not have to regard themselves just as a small, vulnerable minority; they were part of a truly global and powerful movement." Nowadays he accepts that book-banning is wrong, though he looks back with gratitude on the protests. "It was a seminal moment in British Muslim history," he told me. "It brought Muslims together. Before that they had been identified as ethnic communities but The Satanic Verses brought them together and helped develop a British Muslim identity, which I'm sure infuriates Salman Rushdie."

One reason for Rushdie's fury could be that an identity forged on terrorising a fiction writer, with its direct associations of violence and censorship, is not a fair one to hang on two million Britons. Kenan Malik suggests that it is a myth that "all Muslims were offended by The Satanic Verses. In fact, most Muslims were little concerned about it." But as with most political arguments, in this particular identity parade apathy never got a look in. Instead the most outspoken "community leaders" claimed, and were duly assigned, the mantle of authentic representatives of Muslim Britain.

Yet again Khomeini was onto something. The expressed intention of his fatwa was to defend and strengthen the clergy, and one of its effects in Britain has been to create a kind of pseudo-clergy, a class of Islamist intellectuals and militants who presume to speak not just for their co-religionists in Britain but 1.5 billion Muslims worldwide. At the same time, in the late 80s and early 90s, another clergy of fundamentalist preachers, often refugees from despotic Middle Eastern regimes, began to attract a disaffected constituency that had been radicalised by The Satanic Verses protests. As Hirsi Ali put it to me: "The paradox in the UK with regard to freedom of expression is that most of the radical literature and most of the radical mosques moved from Syria, Egypt and Saudi Arabia and established themselves in the liberal West, where there is freedom of religion and expression, with the bizarre purpose of destroying those freedoms."

In the 20 years since the fatwa, the parameters of cultural debate in Britain and elsewhere have undoubtedly narrowed. If the Islam of Khomeini and other fundamentalists has played a key role in redefining what is and is not acceptable, then it is not the only factor. Other religions have also got in on the censorship act. In 2004 the play Behzti (Dishonour) was cancelled at the Birmingham Rep after a riot by Sikh protesters on the opening night. Christian groups too have taken to organising more intimidating protests - though with less success - against shows and productions they deem offensive.

Taken together they are all part of a multicultural accommodation that has come to determine the terms of public discourse. In hindsight, The Satanic Verses was published at a turning point in progressive politics. Throughout much of the 20th century a battle had been waged against discriminating on the basis of race (The Satanic Verses itself was avowedly anti-racist) and class. In other words, those aspects of humanity that are biologically inherited or socially imposed. For a variety of reasons, including the fall of the Berlin Wall later on in 1989 and the emergence of minority group activism, a new identity politics emerged. Class and race were replaced or trumped by culture.

The emphasis moved to combating cultural discrimination. All cultures were deemed equal, and therefore all components of culture - religion, tradition, beliefs - had to be protected from critical appraisal. Obviously culture is socially inherited, but in a free society it is also a matter of freedom of choice. The liberty to change your beliefs, reject your traditions and question your religion is what distinguishes individuals from members of an enforced collective. Such liberty necessitates the discussion and expression of ideas that may be unpalatable to others. Increasingly, therefore, this has become a process that is actively discouraged.

Respecting culture has come to mean restricting debate. Malik quotes the sociologist Tariq Modood on this issue: "If people are to occupy the same political space without conflict, they mutually have to limit the extent to which they subject each other's fundamental beliefs to criticism."

To some extent this sensitivity has been achieved by coercion - the fatwa model. But there has also been a more voluntary adoption of multicultural manners, chief among which is the duty not to offend. And where that has failed, the government has shown itself all too willing to step in with proscriptive legislation. Three years ago we came within a single parliamentary vote of being saddled with a law (the Religious Hatred Act) that meant you or I could be imprisoned for seven years for using insulting language, even if the insult was unintentional and referred to an established truth.

Furthermore, under draconian anti-terror laws, it is now illegal to be in possession of a whole range of reading material. This is one of the terrible ironies of the conflict with reactionary Islam, previewed in the attempt to censor (and kill) Rushdie. In 1989 the British government defended freedom of expression against Islamic extremists. By 2009 Islamic extremists could accuse the British government of withdrawing freedom of expression. That the extremists dream of a far more extensive (and violent) censorship is no comfort or excuse.

Rushdie has now moved on, figuratively and geographically, from the fatwa years. Back from the front pages, he has once again relocated, having lived in Mumbai and London, to New York (he is not alone in noting that all three cities have suffered Islamic terror attacks). But The Satanic Verses remains a book about the struggles of migration and the frictions of cultural exchange. It pokes fun at all manner of targets, not least America and Britain. Above all, perhaps, it dramatises the conviction that there is nothing more sacred than the freedom to question what is sacred. Twenty years on, it's a principle that urgently needs to be remembered.

What they said at the time

Harold Pinter playwright

"A very distinguished writer has used his imagination to write a book and has criticised the religion into which he was born and he has been sentenced to death as well as his publishers. It is an intolerable and barbaric state of affairs."

John Berger author and critic

"I suspect that Salman Rushdie, if he is not caught in a chain of events of which he has completely lost control, might, by now, be ready to consider asking his world publishers to stop producing more or new editions of The Satanic Verses. Not because of the threat to his own life, but because of the threat to the lives of those who are innocent of either writing or reading the book."

Germaine Greer writer and academic

"I refuse to sign petitions for that book of his, which was about his own troubles."

Jimmy Carter US president, 1977-81

"Rushdie's book is a direct insult to those millions of Moslems whose sacred beliefs have been violated ... The death sentence proclaimed by Ayatollah Ruhollah Khomeini, however, was an abhorrent response. It is our duty to condemn the threat of murder [but] we should be sensitive to the concern and anger that prevails even among the more moderate Muslims."

John Le Carre author

"Again and again, it has been within his [Rushdie's] power to save the faces of his publishers and, with dignity, withdraw his book until a calmer time has come ... It seems to me he has nothing more to prove except his own insensitivity."

Roald Dahl author

"[Rushdie] knew exactly what he was doing and cannot plead otherwise.This kind of sensationalism does indeed get an indifferent book on to the top of the bestseller list - but to my mind it is a cheap way of doing it.

Sir Geoffrey Howe foreign secretary, 1983-89

The British government, the British people, do not have any affection for the book ... It compares Britain with Hitler's Germany. We do not like that any more than the people of the Muslim faith like the attacks on their faith contained in the book. So we are not sponsoring the book. What we are sponsoring is the right of people to speak freely, to publish freely."



Twenty years on: how the fatwa on Salman Rushdie has gagged our society