Photo of Sir Salman courtesy of the BBC
While agreeing it was "sensitive", the right to express opinions was "of over-riding value" to society, he said.
Iraqi Foreign Minister Hoshyar Zebari said the knighthood was "untimely", but a matter for the British government.
Mr Rushdie went into hiding after an Iranian fatwa ordered his execution, over his 1988 book The Satanic Verses.
Mr Reid told an audience in New York that many Christians had been offended by Monty Python's Life of Brian, while some Jewish people were offended by Mel Gibson's film The Passion of the Christ. Reid defends Rushdie knighthood (more)
Mark Alexander