What this means depends on whom you ask.
Some consider the development a victory, arguing that it means a "fundamentalist" organization -- its Web page calls for "the Islamization of knowledge" -- with possible ties to terrorism, coupled with a narrow and anti-Israel worldview, will not have a say in what's taught on the North Philadelphia campus.
Others view it as another instance of Islamophobia, in which intolerance has trumped openness and diversity, and where the good name of a progressive Muslim organization has now been smeared.
According to a press release, Temple had decided neither to accept nor reject the offer. Several sources stated that the ultimate decision rested with the university's president, Ann Weaver Hart.
Temple "indicated that no decision regarding this matter would be made until post-9/11 federal investigations of the IIIT are complete," Mark Eyerly, a school spokesperson, stated in the release.
The investigation refers to the case of Sami Al-Arian, a former University of South Florida professor who was charged in 2002 with using his own think tank to fund Palestinian terror groups. In 2005, a Florida jury acquitted him on eight counts and deadlocked on nine others.
Al-Arian reached a deal with prosecutors, pleading guilty to one count, which came with a 57-month sentence.
In the course of the investigation, the Justice Department searched the IIIT's Virginia offices. According to published reports, it had donated funds to Al-Arian's think tank.
According to Nancy Luque, an attorney for IIIT, the institute has never faced criminal charges or had its assets frozen by the government.
But it appears that the federal investigation into the group has never officially been closed.
"They are very progressive; they are the opposite of fundamentalist. They want to enhance education of a very moderate, if not liberal, understanding of the Koran," said Luque, referring to IIIT. "Our money comes from and stays within the United States."
Luque -- who also represented Jonathan Pollard, convicted in 1986 of spying for Israel on behalf of the United States -- lamented that "now, our chances of doing this are destroyed; we are ruined." She was referring to IIIT working with a major university.
She also suggested that certain "right-wing Jewish groups" may have exerted pressure on Temple to steer clear of any relationship with IIIT, although it's not clear that this was the case.
At least one Jewish professor, Rebecca T. Alpert, who chairs Temple's religion department, lobbied hard in favor of accepting the donation.
"I felt comfortable about their intentions. I believe their motivation was to educate students about Islam and nothing more," she said. While noting that she doesn't agree with everything IIIT has done, she said that the university -- and not donors -- make the decisions about how funds are spent.
"They want people to learn more about Islam, and I think that's a good thing," said Alpert.
The plan had been for the funds to be in place by the end of January in order to honor retiring professor Mahmoud Ayoub with a symbolic title and an endowed professorship.
That endowment would have allowed the religion department to hire a high-caliber Islamic- studies scholar, according to Alpert, adding that she will now begin the search for another funding source.
Ayoub could not be reached for comment. But the Lebanese-born scholar noted in The Philadelphia Inquirer that Temple did not want to be associated with any Muslim organization.
"If Muslims did that, tried to block a Jewish chair or program, I wouldn't have liked it," he told the paper.
But activists and professionals who track Muslim organizations within the United States say numerous reasons exist that cause concern over IIIT and the prospect of the group having a long-standing relationship with a major university. For example, critics point to the fact that the group has published a book by Egyptian cleric Yusuf al-Qaradawi, who in other writings has defended suicide-bomb attacks against Israeli civilians.
"We are talking about Saudi money ... we are talking about a particular worldview that does not recognize the multiplicity of currents within Islam," stated John Matthies, assistant director of Islamist Watch at the Philadelphia-based Middle East Forum. "It is very exclusionary. They teach that there is only one way to talk about Islam.
"I think it was a good result," added Matthies. "It seems that Temple put their hands in their pockets and waited for IIIT to walk away."