This is a huge and complex question. Different kinds of Persian literature were read by different Muslim elites for different purposes in different eras. I’ll try to offer a concise overview here, but please feel free to follow-up if I can provide more detail or clarification. Also, since it’s less in my wheelhouse and would make this even more daunting to answer, I’m mostly avoiding your counter-question on Islamicate reception of Greek and Latin texts. As you indicate, it’s largely true that there was little Islamicate reception of Classical works that we would consider “literature” (as opposed to philosophical or medical treatises) in the premodern world. Two prominent exceptions are the Alexander Romance cycle, which originated in Greek texts of the 3rd century CE but became immensely popular across the Middle East and Europe; and the corpus of Hellenistic novels about pairs of star-crossed lovers. These almost certainly influenced later Islamicate love stories--for one novel, Metiokhos and Parthenope, we even have a fragmentary 11th century Persian adaptation, ‘Onsori’s Vāmeq o ‘Azrā. However, the works we most often associate with Classical literature, like the Iliad or the Greek tragedies, were almost entirely unknown in the Muslim world until the 19th and 20th centuries.

But as your question indicates, Persian is a different story. The first set of Persian texts to play an important role in Islamicate cultures actually predate the Muslim conquest of Iran (mid-7th century CE). These are works associated with the late Sasanian court, particularly its cultural efflorescence under Khosrow I Anushirvān (“Immortal Soul,” reigned 531-579). Virtually none of these texts survive in their Middle Persian forms, so their exact date and place of origin is somewhat uncertain. But they include some of the great hits of global medieval literature: Kalīlag ud Damanag, a translation of the Sanskrit Pañcatantra; Bilawhar ud Budāsaf, the story of the Buddha, which reached the West as Barlaam and Josaphat; Hazār Afsāna (“A Thousand Legends”), which became the Arabic 1001 Nights.

Translated from Middle Persian into Syriac, then into Arabic and often an array of other languages (Greek, Latin, Welsh, Icelandic…), these became hugely widespread and influential texts. Their similar histories do belie important differences in content. Kalīlag ud Damanag is a collection of fables that doubles as a treatise on political strategy (a “mirror-for-princes”). While initially spread through Buddhist networks--there were many Buddhists in the Sasanian Empire, particularly in the eastern provinces--the religious narrative of Bilawhar o Budāsaf became adapted to other spiritual contexts, including Manichaean and Christian belief systems. Hazār Afsāna seems to have always been regarded as a frivolous and fantastical entertainment. Rather than filling a single sociocultural purpose in the late antique Middle East, then, this first group of texts seem to have been associated with the prestige and sophistication of the Sasanian court as well as with coveted “eastern” wisdom. Most of this corpus has its origins in India, and is often linked to Khosrow’s diplomatic and cultural exchanges with Indian rulers. The same channels are said to have brought the board game caturaṅga into Persian courts. Like the aforementioned texts, caturaṅga spread throughout Eurasia, evolving later into modern chess.

As the early caliphs expanded their domains across the vast regions of the former Sasanian Empire, they incorporated local elites who retained some degree of pre-Islamic cultural affiliations alongside their new Muslim identities. An important example is Abū Muḥammad Rūzbih ibn al-Muqaffa’ (c. 721-757 CE), whose prolific body of work includes Kalīla wa Dimna, the first Arabic translation of Kalīlag ud Damanag. Ibn al-Muqaffa’ came from an old noble family of Fārs, the “Persian heartland” of south-central Iran, but he used his impressive mastery of Arabic to secure literary contacts and a coveted position as secretary to a family with caliphal ties in the Iraqi city of Basra. Though he died young, brutally executed by a political rival, ibn al-Muqaffa’’s work solidified the role of Persianate literature in defining ‘Abbasid standards of courtly conduct. The word that ibn al-Muqaffa’ used for this calculated refinement is adab, which in Modern Arabic has come to mean “literature.”

Ibn al-Muqaffa’ is said to have also translated the major compendium of pre-Islamic Persian royal myth and history, the Xwadāynāmag (“Book of Lords”), into Arabic, though no part of this survives. But subsequent scholars followed his lead in insisting on the importance of the Iranian past for Muslim conceptions of history. Perhaps the most prominent figure in this regard is the great scholar Abū Ja’far Muḥammad al-Ṭabarī (839-923). Al-Ṭabarī hailed from the Iranian region of Tabarestān (modern Māzandārān), but after youthful studies and travels across the Islamic world, he settled in the caliphal capital of Baghdad and devoted himself to writing some of the most voluminous and important texts in medieval Arabic. In his Ta’rīkh ar-Rusūl wa-l-Mulūk, “History of Prophets and Kings,” he offered an account of world history from the Creation down to his own era. For al-Ṭabarī, “The history of the world’s bygone years is more easily explained and more clearly seen based upon the lives of the Persian kings than upon those of the kings of any other nation… Thus, a history based upon the lives of the Persian kings has the soundest sources and the best and clearest data” (trans. Franz Rosenthal, p. 319 of the first volume of The History of al-Ṭabarī). By synthesizing timescales--as well as specific characters and mythological beings--between Semitic religious sources and Persian chronicles, al-Ṭabarī created a unified account of the past in which Arabs and Persians alike could participate. The Ta’rīkh also contains some of the earliest datable versions of stories which became more famous through Ferdowsi’s retellings in the Shāhnāmeh, which we’ll get to in a moment.

(cont.)