"This ill advised decision approved by the Prime Minister should not divert you from your course of peaceful protest in the face of this deliberate provocation," said Muslim Council of Britain (MCB) Secretary General Abdul Bari.
"Indeed, it should be used as an opportunity to correct the maligning of the character of the Prophet Mohammad (PBUH) in the book which earned its author his notoriety," Bari said in a letter to some 500 mosques and local organisations affiliated to the MCB.
The MCB urged Muslims to act with "dignity and wisdom and channel their hurt towards positive and peaceful actions" and resist efforts by fringe groups to inflame and exploit the situation.
The mainstream umbrella organisation also asked Britain two million British Muslim community to convey their feelings through letter to parliamentary representations and through the local and national media "at all times observing propriety and restraint." "Muslims can only see this action as an attempt to create deep offense to Muslims and divert their attention from contributing to community cohesion in this challenging time," said Bari.
MCB letter came as protestors assembled at London's central mosques after Friday prayers to condemn the decision to give Rushdie the highest award in political honors announced to mark the Queen's birthday last weekend.
"The British Government's decision to honour Salman Rushdie is a public demonstration of their hatred and contempt towards Islam," said leaflets handed out at the protest.
Many Muslims have already accused Prime Minister Blair of being tactless in rekindling the dispute just before he steps down from power next week.
"It's hypocrisy by Tony Blair who two weeks ago was talking about building bridges to mainstream Muslims, and then he's honouring a man who has insulted the British public and been divisive in community relations," Labour peer Lord Ahmed said.
On Wednesday, Conservative MP Stewart Jackson joined the outcry, saying the knighthood was 'gratuitously offensive' and should be reviewed.
"If the senior officers of the Foreign and Commonwealth Office were not able to use their knowledge of the Islamic world to consider the likely ramifications of this decision, then I'm extremely concerned," Jackson said.