Canada is closing its embassy in Iran and expelling the remaining Iranian diplomats in Canada, Foreign Minister John Baird has said in a statement.
The Canadian government cited Iran's support for Syrian President Bashar al-Assad and failure to comply with UN inspectors as the reason for the move.
Iranian diplomats have been given five days to leave Canada.
An Iranian spokesman called the decision "hasty and extreme", the semi-official Fars news agency reported.
Ramin Mehmanparast, from the country's foreign affairs agency, added that the Canadian government had "a long record of animosity" towards Iran.
Mr Baird's statement on Friday said that Canada viewed Iran "as the most significant threat to global peace and security in the world today".
He also said that Iran had engaged in "racist anti-Semitic rhetoric and incitement to genocide", and had shown "blatant disregard" for the protection of diplomatic personnel.
"Under the circumstances, Canada can no longer maintain a diplomatic presence in Iran," he added.
Ottawa also designated Iran as a state-sponsor of terrorism and included it among a list of countries subject to travel warnings for Canadian citizens.
"Because of the hostile decision by the government of Canada, the embassy of the Islamic Republic of Iran in Ottawa is closed and has no choice but to stop providing any consular services for its dear citizens," a note in Persian posted on the door of Iran's Canadian embassy said, according to the Associated Press.
Canada's decision removes another channel through which the US gets first-hand diplomatic updates from the country.
"We share Canada's concerns regarding Iran's behaviour," US State Department spokesman Patrick Ventrell said on Friday. "We want all countries to join us in isolating Iran."