Dictionaries define Blasphemy as a contemptuous or profane 
act, utterance, or writing concerning God or a prophet or 
sacred entity. It also means the act of claiming for oneself  the attributes and rights of God. It is also an irreverent or 
impious act, attitude, or utterance in regard to something 
considered inviolable or sacrosanct.

In common law in the West, Blasphemy is a crime of speaking or publishing words that vilify or ridicule God, the Bible, or 
religious beliefs. Scurrility and a resultant tendency to provoke 
a public disturbance are the criteria for blasphemy. Laws that 
condemn it are held to be in consonance with the laws that protect freedom of speech. Blasphemy is still a crime in Britain and in most of the United States, but prosecutions are now rare. But in medieval  Europe people used to be burned alive or killed for blasphemy. Ridiculing Pope and Clergy was treated as a form of blasphemy. Here is an extract from Bible.

'All manner of sin and blasphemy shall be forgiven unto 
men: but the blasphemy against the Holy Ghost shall not be forgiven unto men.' _ Bible: New Testament. Matthew 12:31

"You will continue to come upon some act of treachery on their part, except for a few of them, so pardon them and overlook." AlQuran,5:15 

All manner of sin and blasphemy shall be forgiven unto 
men: but the blasphemy against the Holy Ghost 
shall not be forgiven unto men.' 
_ Bible: New Testament. Matthew 12:31

When the Holy Prophet (PBUH) started preaching Islam he faced stiff opposition . He was offered bribe to give up preaching the new religion. When that failed, he was abused and molested. But he continued his mission undaunted and his following continued growing. Kuffar tried to threaten him and started plotting to assininate him. But Holy prophet showed utmost patience and restraint. He forgave who had abused and molested him. But where kindness and courtesy did not prove to be efficacious and there was potential danger that physical harm would come to the Holy Prophet (PBUH) his follower killed the aggressors before they could carry out their threatened action. 

Islam came to be known as a religion that provided relief 
from all sorts of oppression and injustice. That is why Famous English writer H.G. Wells (1866-1946) wrote:

Islam established in the world a great tradition of 
dignified fair dealing and created a society more free from wide spread cruelty and social oppression than any society had been in the world before'.
_ H.G. Wells (1866-1946) 

During lifetime of the Holy Prophet (PBUH) blasphemy used to treated with tolerance, except where there was potential danger of physical harm or where attempts were made to deliberately obstruct movement and speech of the Holy Prophet or to assisinate him.

After death of the Holy Prophet (PBUH)  certain persons tried to launch vilification campaign against the Holy Prophet (PBUH) and the Caliphs to obstruct fast developing popularity of Islam. During this period the enemies of Islam committing blasphemy with intent to disrupt peace were punished by death sentence. The fatwas  (Rulings) issued during that period  became laws of  Shariat. The 
laws relating to blasphemy in Pakistan were modified during 
the last decade when Shariat courts were strenghthened.. 

Salman Rushdie,  born in 1947 in Bombay India became 
infamous by writing  a deplorable book  The Satanic Verses 
in 1988.  The book contained mischievious and disparaging 
remarks about the Holy Prophet (PBUH) and distorted facts 
about Islam. It was banned in several Islamic countries. The publishers and the author tried to cash in on these protests 
and intensified publicity for its sale. In 1989 Iran's Ayatollah 
Ruhollah Khomeini took notice of this devilish campaign and 
declared that Rushdie and everyone involved in the book's 
publication deserved to  be put to death, Rushdie's went in 
hiding in Britain having acquired British nationality.

Generally Muslims believe that uttering disparaging words about
the Holy Prophet (PBUH) is a grave sin. Orthodox Muslims believe that it a crime too that is punishable by killing. They appear to have been influenced by the Orthodox Ulema who quote different verses from Holy Quran and traditions narrated by different companions of the Holy Prophet and others.

In various discussion groups on the Internet the case of 
Dr. Mohammed Younas a lecturer of  homeopathic college who 
was sentenced to death by a district court in Islamabad came 
up for discussion . A group of students had complained to a 
religious leader that during a lecture he had made blasphemous 
remarks. The accused denied the charges and submitted a written statement to the court that he had full faith in Islam and 
could not even think of committing blasphemy.

The International media is treating the incident as an indication 
that like Afghanistan, Pakistan is also going in the hands of 
religious extremists. Most of the Muslim participants have 
sympathized with the Dr. Younus and hoped that Laws would be 
interpreted or reviewed in the Islamic tradition of tolerance, 
kindness and forgiveness. They pointed out that the Holy Prophet
(PBH) used to forgiv a number of people who abused and even
molested him. Even prisoners of war used to be treated kindly 
by him. The virtues of forgiveness, tolerance and kindness are 
narrated in Holy Quran and in the sayings of Holy Prophet (PBH) 
on a number of places.They opined that in that spirit the laws 
relating to blasphemy may be interpreted and reviewed
where necessary. 

On the other hand those who support the existing law about 
blasphemy opine that the issue related to blasphamy of Rasul 
Allah, sallallahu alayhi wa  sallam, is a matter of shari'a. It has already been decided not by us but by Allah subhanahu wa ta'ala in His glorious book.  What he,  sallallahu alayhi wa sallam, waived out of his mercy is his personal choice but now for us there no scope for it. For details
http://ds.dial.pipex.com/masud/ISLAM/misc/alshifa/pt4intro.htm

Here are some extracts from that web site:
'The proof of the necessity of killing anyone who curses the 
Prophet or finds fault with him. 

----Allah says, "Those who harm Allah and His Messenger, Allah 
has cursed them in this world and in the Next, and has prepared 
for them a humiliating punishment." (33:57). ------

Allah says,"Cursed they will be. Wherever they are found, 
they are seized and all slain." (33: 61) He mentions the 
punishment of those who fight, "That is humiliation in this 
world for them." (5:45) 

["Killing" (qatl) can have the meaning of "curse".]

 Allah says, "May the conjecturers be killed!" (51:11) and 
"May Allah fight them! How they are perverted!" (9:30) i.e.
may Allah curse them. 

This is because there is a difference between their harming 
Allah and His Messenger and harming the believers. Injuring 
the believers, short of murder, incurs beating and exemplary 
punishment. The judgement against those who harm Allah and 
His Prophet is more severe - the death penalty. Allah says, 
"No, by your Lord, they will not believe until they have you 
judge between them in what they disagree about." (4:65) He 
removes the badge of belief from those who find an impediment 
in themselves against accepting the Prophet’s judgement and 
do not submit to him. Anyone who disparages him is opposing 
his judgement. 

Allah says, "O you who believe, do not raise your voices above 
the voice of the Prophet and be not loud in your speech to him 
as you are loud to one another lest your actions fail." (49:3). 
Such an action only comes about through disbelief and the 
unbeliever is killed.  Allah says, "When they come to you, 
they greet you with a greeting which Allah never greeted you 
with." Then He says, "Jahannam is enough for them, an evil 
homecoming." (58:9) 

Allah says, "Among them are those who harm the Prophet and say that he is all ear," (9:61) and, "Those who harm the Messenger of Allah have a painful punishment." (9:63) 

Allah says, "If you ask them, they will say, 'We were only 
plunging and playing.' Say, 'What, were you then mocking Allah, 
His signs and His Messenger? Make no excuses. You have 
disbelieved after your belief."'(9:67-68) ----

In a sound hadith the Prophet commanded that Ka'b ibn al-Ashraf be killed. He asked, "Who will deal with Ka'b ibn al-Ashraf? He 
has harmed Allah and His Messenger." He sent someone to 
assassinate him without calling him to Islam, in distinction to other
idol-worshippers. The cause of that lay in his causing harm to 
the Prophet. That indicates that the Prophet had him killed for 
something other than idol-worship. It was for causing harm. 
Abu Rafi,' who used to harm the Messenger of Allah and work 
against him, was also killed. Similarly on the Day of the Conquest, he ordered the killing of Ibn Khatal and his two slavegirls who used to sing his curses on the Prophet. 

In another hadith about a man who used to curse the Prophet, 
the Prophet said,"Who will save me from my enemy?" Khalid said, "I will," so the Prophet sent him out and he killed him. 

Similarly the Prophet commanded that a group of unbelievers who used to injure and curse him, like an-Nadr ibn al-Harith and 
'Uqba ibn Abi Mu'ayt, be killed. He promised that a group of 
them would be killed before and after the conquest. They were 
all killed except for those who hurried to become Muslim before 
they were overpowered. Al-Bazzar related from Ibn 'Abbas that 
'Uqba ibn Abi Mu'ayt cried out, "O company of Quraysh, why is it 
that I alone among you am to be killed without war?" The Prophet 
said, "For your disbelief and your forging lies against the 
Messenger of Allah." 
--------It is related that a woman used to curse the Prophet and 
he said, "Who will save me from my enemy?" Khalid ibn al-Walid 
went out and killed her. -------It is related that a man forged 
lies against the Prophet and he sent Ali and az-Zubayr to kill 
him.  ----------------Ibn Qani' related that a man came to the 
Prophet and said, "Messenger of Allah, I heard my father say 
something ugly about you, so I killed him," and that did not 
distress the Prophet. 

Al-Mujahir ibn Abi Umayya, the Amir of Yemen, reported to Abu 
Bakr that a woman there in the time of the Ridda[8]chanted 
curses against the Prophet, so he cut offher hand and pulled out 
her front teeth. When Abu Bakr heard that, he said to him, 
"If you had not done what you already did, I would have commanded you to kill her  because the hadd regarding the Prophet is not like the hadd regarding others." 

----In the hadith of Abu Barza as-Aslami it says, "One day I was 
sitting with Abu Bakr as-Siddiq and he became angry at one of
the Muslim men." Qadi Isma'il and other Imams said that the man had cursed Abu Bakr. An-Nasa'i related it as, "I came to  Abu Bakr and a man had been rude and answered him back. I said, 
'Khalif of Allah,let me strike off his head!' He said, 'Sit down. 
That is not for anyone except the Messenger of Allah, may Allah 
bless him and grant him peace.' 

Qadi Abu Muhammad ibn Nasr said, "No one disagreed with him." So the Imams take this, as a proof that anyone who does anything that might anger, harm or curse the Prophet in any way should be killed. 

There is also the letter of 'Umar ibn 'Abdu'l-'Aziz to his 
governor in Kufa. He had asked his advice about killing a man 
who had cursed 'Umar. 'Umar wrote back to him, "It is not lawful 
to kill a Muslim for cursing anyone except the Messenger of Allah. Whoever curses him, his blood is lawful." 

Harun ar-Rashid asked Malik about a man who had reviled the 
Prophet and he mentioned to him that the fuqaha' of Iraq had 
given a fatwa that he be flogged. Malik became angry and said, 
"Amir al-Mu'minin! There is no continuation for a community 
after it curses its Prophet! Whoever curses the Companions of 
the Prophet is to be flogged." 

It is well known that Muslim Ummah is divided in many different sects. The main reasons are the way the verses of Holy Quran are interpreted and the credence and interpretation given to traditions. Many sects do not recognize various fatwas given  centuries ago as law as according to them they were given under a different set of circumstances whereas some believe them to be the part of Sahria. 

Besides great variations in convictions and thinking of different 
sects and ulemas, it is a sad fact that the Ummah has forgotten 
the real teachings of the Holy Prophet(PBUH) relating to acquisition of knowledge, honest dealings in our day to day activites, kindness, Human rights, Zakat, fasting and prayers, piety and taqwa etc. but we become very sentimental when some Muslim brethern do not agree with our interpretation of Holy Quran and Hadiths on much less important issues. We do follow the path prescribed for honest earnings and doing productive work for the progress and welfare of the country and the Ummah but waste time in counter productive issues.   May Allah help us to understand what is right and what is wrong. Sectarian hatred has become a serious problem and there is greater need for tolerance and patience. Let us remember what the Holy Quran says: "You will continue to come upon some act of treachery on their part, except for a few of them, so pardon them and overlook." (5:15) 

Marmaduke Pickthall, the British scholar of Islam and translator of the Quran had written, "It was not until the Western nations broke away from their religious law that they became more tolerant, and it was only when the Muslims fell away from their religious law that they declined in tolerance."