This is used to send back an error packet in response to the matched packet: otherwise it is equivalent to DROP so it is a terminating TARGET, ending rule traversal. This target is only valid in the INPUT, FORWARD and OUTPUT chains, and user-defined chains which are only called from those chains. The following option controls the nature of the error packet returned:

--reject-with type
    The type given can be
     icmp-net-unreachable
     icmp-host-unreachable
     icmp-port-unreachable
     icmp-proto-unreachable
     icmp-net-prohibited
     icmp-host-prohibited or
     icmp-admin-prohibited (*)
    which return the appropriate ICMP error message (port-unreachable is the default). The option tcp-reset can be used on rules which only match the TCP protocol: this causes a TCP RST packet to be sent back. This is mainly useful for blocking ident (113/tcp) probes which frequently occur when sending mail to broken mail hosts (which won't accept your mail otherwise).

(*) Using icmp-admin-prohibited with kernels that do not support it will result in a plain DROP instead of REJECT