This paper discusses the iterative solution of the nonlinear problem of optical tomography. In the established forward model-based iterative image reconstruction (MOBIIR) method a linear perturbation equation containing the first derivative of the forward operator is solved to obtain the update vector for the optical properties. In MOBIIR, the perturbation equation is updated by recomputing the first derivative after each update of the optical properties. In the method presented here a nonlinear perturbation equation, containing terms up to the second derivative, is used to iteratively solve for the optical property updates. Through this modification, reconstructions with reasonable contrast recovery and accuracy are obtained without the need for updating the perturbation equation and therefore eliminating the outer iteration of the usual MOBIIR algorithm. To improve the performance of the algorithm the outer iteration is reintroduced in which the perturbation equation is recomputed without re-estimating the derivatives and with only updated computed data. The system of quadratic equations is solved using either a modified conjugate gradient descent scheme or a two-step linearized predictor-corrector scheme. A quick method employing the adjoint of the forward operator is used to estimate the derivatives. By solving the nonlinear perturbation equation it is shown that the iterative scheme is able to recover large contrast variations in absorption coefficient with improved noise tolerance in data. This ability has not been possible so far with linear algorithms. This is demonstrated by presenting results of numerical simulations from objects with inhomogeneous inclusions in absorption coefficient with different contrasts and shapes.