William Tyrell, dressed in his favourite Spiderman suit, was last seen playing in the front yard of a house in Kendall on the NSW mid-north coast on the morning of September 12, 2014.
Police Commissioner Andrew Scipione said the case had "captured the hearts and minds of the nation".
Joined by Premier Mike Baird in Sydney on Monday Mr Scipione said the "unique reward" is "one million reasons why somebody that's out there that knows what's happened should come forward and talk to us".
"We've never had a $1 million reward ever before," he added.
Mr Baird hopes the substantial offer will help bring back William to his family.
"Two years ago today, the tragic disappearance of a young boy ... (was) an event that tore that family apart," he told reporters.
"Those million dollars, we hope, encourages anyone with any information to come forward to reunite William with his family."
The man in charge of the investigation, Chief Inspector Gary Jubelin, said it was "unacceptable that two years down the track we haven't found out what's happened to William".
He said police had numerous lines of inquiry and hoped the reward would be another tool.
Strike Force Rosann has taken information about nearly 700 persons of interest in relation to the case, and extra resources have been assigned to the investigation.
Police have previously said the then-three-year-old could have been the target of a pedophile ring operating in the north coast region.
"It is the state's largest investigation," Insp Jubelin said.
"We've had over 2,800 reports to Crime Stoppers alone from members of the public providing information. We have a further 196 reports directly to the strike force. We've had 1,078 sightings of William Tyrrell.
"We're identified 690 persons of interest," he said.
"I want to make it very clear that the fact that we've got so many persons of interest doesn't mean that we have no idea on what's happened," Inps Jubelin said.
Strikeforce Rosnan will also include assistance from the Armed Hold-up squad, the Sex Crimes squad, the Fraud squad as well as the Local Area Commands.
Insp Jubelin guaranteed protection for anyone who comes forward with information.
"I can guarantee personally that we can protect your identity. We can protect your safety," he said.
Washing machine repairman William "Bill" Spedding has been the most high-profile person to be questioned during the years-long investigation.
The 65-year-old has strenuously denied any involvement in William's disappearance and has not been arrested or charged in relation to the case.
The case has been referred to the NSW coroner but police say investigations continue with the hope the young boy is alive.
William Tyrrell 'lost' scenario ruled out
The man at the helm of the high-profile NSW police investigation into the disappearance of William Tyrrell says it's 'unacceptable' the little boy's family is still waiting for answers two years on.
Detective Chief Inspector Gary Jubelin on Monday announced a $1 million reward, the largest offered in the state's history, for information leading to William's return, dead or alive.
The small mid-north coast town of Kendall mobilised in the days after the 3- year-old disappeared on September 12, 2014, combing the dense bushland surrounding the property where he vanished, in a search that continued on and off for months.
DCI Jubelin acknowledged that in the first days and weeks after William disappeared, investigators focused on the possibility they were dealing with a "little boy lost".
But it was now clear that the boy in the Spiderman costume had not wandered off but had met with foul play as he played in his grandmother's yard.
"It's unacceptable that two years down the track we haven't found out what's happened to William," DCI Jubelin said.
"If he's alive, or if we find William's remains, as unpalatable as that sounds, we've said to the family we're going to do everything possible to find out what's happened to William."
He has also dismissed as "vindictive" any lingering suggestions that William's own relatives were involved in his abduction.
"I've personally interviewed the family and I'm saying they've had nothing to do with it," DCI Jubelin said.
He could not rule out the possibility that a paedophile ring was involved in snatching the little boy but would not discuss any of the 690 persons of interest identified so far as part of the broader investigation.
He has also urged members of the public not to waste detectives' time with tip- offs about "clairvoyants or dreams" and spurious sightings.
"If a child's getting round in the McDonald's carpark in a Spiderman suit now, two years after William's disappeared, we're not particularly interested," he said.
"But what we would be interested in (would be) if anyone's got concerns about the circumstances in which a child has come into a family."
