Central bank governor Tahmasb Mazaheri said the move was intended to reassert control over the money supply as the bank considers broader currency reform amid double-digit inflation.
A 500,000-rial (35-euro) note was issued on Saturday and a one-million rial note is to follow this weekend, Mazaheri told the official IRNA news agency on Wednesday.
State television carried a central bank statement on Thursday reassuring the public that the new paper notes should be regarded as legal tender just like ordinary banknotes.
Iran's highest denomination banknote is a 50,000-rial note which was introduced in March 2007.
"Old notes which were being printed uncontrolled by different banks had lowered the possibility of controlling money supply," Mazaheri told IRNA.
He said the bank was also considering knocking three or four zeroes off the rial in a wider currency reform.
"We hope that with modification of the monetary system, we can print higher denomination notes," he said.
On the face of the new 500,000-rial note is a bold "50," which could prepare the way for such reform.
Iran has seen a sharp increase in money supply growth in recent years. It topped 26 percent in June compared to the same month in 2007.
