The United States has said it would not grant a visa to Iran's proposed UN ambassador, citing the envoy's links to the 1979-1981 hostage crisis.
President Barack Obama had come under strong pressure not to allow Hamid Abutalebi into the country to take up his position in New York.
There are concerns that the dispute would disrupt delicate negotiation between Tehran, Washington and other world powers over Iran's nuclear programme.
White House spokesman Jay Carney said the United Nations and Iran had been told "that we will not issue a visa to Mr Abutalebi."
Neither the White House nor the State Department provided further explanation.
US law allows the government to bar UN diplomats who are considered national security threats.
However, Mr Obama's potentially precedent-setting step could open the US to criticism that it is using its position as host nation to improperly exert political influence.
The US government objects to Mr Abutalebi because of his suspected participation in a Muslim student group that seized the embassy in November 1979 and held 52 Americans hostage for 444 days.
The veteran diplomat has acknowledged that he acted as an interpreter for the militants who held the hostages.
Mr Obama's decision came days after negotiators from Iran, the United States and five other world powers met in Vienna for another round of nuclear talks.
A spokesman for Iran's mission to the UN said the White House decision was unfortunate and may violate international law.
"It is a regrettable decision by the US Administration, which is in contravention of international law, the obligation of the host country and the inherent right of sovereign member states to designate their representatives to the United Nations," spokesman Hamid Babaei said in a statement.
Iran said it is pursuing Mr Abutalebi's case directly through the UN.
"We do not have a replacement for Mr Abutalebi and we will pursue the matter via legal mechanisms anticipated in the United Nations," Abbas Araghchi, a senior Foreign Ministry official and top nuclear negotiator, was quoted by Iran's official IRNA news agency as saying.
Earlier, an Iranian official said he did not expect the dispute to affect the nuclear negotiations.
Any official response would be up to the Iranian Foreign Ministry, but the US decision "will have no impact on our talks with the P5+1," the official told Reuters.
US officials also said they did not expect any impact.
The UN said it had no comment at this time on the US decision.