Iraq beat their old foes on penalties in the quarter-finals but Iran submitted a formal protest, asking for the result to be overturned.
In the protest, Iran alleged that Iraq had fielded an ineligible player during the quarter-final match in Canberra on Friday.
The Iranians alleged that Iraqi midfielder Alaa Abdul-Zahra should have not been allowed to play because he had submitted a positive doping test while playing for an Iranian club side last year.
The Asian Football Confederation's (AFC) Disciplinary Committee met in Sydney on Sunday to discuss the case while the Iranian team remained in Australia in case the verdict went their way.
On Sunday evening, the AFC announced the protest had been dismissed and Iraq would take their place against South Korea in the semi-finals.
"The AFC Disciplinary Committee from 2:30pm heard oral evidence from two officials of the I.R. Iran Football Federation, deliberated the matter based on its merits, and decided that the protest was unfounded. The protest was therefore dismissed," the AFC said in a statement.
"Due to the urgency of the matter, the terms of the decision were initially notified to the I.R. Iran Football Federation at 6:20pm. The full grounds of the decision will be communicated tonight in due course. The I. R. Iran Football Federation will have the right to file an appeal in accordance with the AFC Disciplinary Code."
It was not immediately clear whether Iran would lodge an appeal but the Iraq team said they were confident the case was closed.
"It's over," a team spokesman told a news conference. "We play tomorrow."
(Editing by Sudipto Ganguly)
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