The move comes just hours after protesters stormed the Swedish embassy in Baghdad and set it on fire.
Iraq's Prime Minister has ordered the expulsion of the Swedish ambassador to Baghdad on Thursday, ahead of a rally in Stockholm where a man threatened to burn a copy of the Koran.
In a statement, Mohamed Chia al-Soudani, "asked the Swedish ambassador in Baghdad to leave Iraqi territory", adding that the Iraqi chargé d'affaires in Stockholm had been recalled.
This decision follows "repeated incidents of desecration of the sacred Koran" with the permission of the Swedish government, "insults to Islamic shrines and the burning of the Iraqi flag", the government statement says.
Iraqi authorities have also suspended the operating license of Swedish telecomms company Ericsson on Iraqi territory.
On Thursday, a man trampled on the Koran in front of the Iraqi embassy in Stockholm, but decided not to burn it as he had announced. He was harangued by an audience of a few dozen people, most of whom were hostile to his action.
One of the organisers of the Stockholm rally, Salwan Momika, an Iraqi refugee in Sweden, had announced on Facebook that he wanted to burn a copy of the Koran and an Iraqi flag.
Swedish embassy in Baghdad attacked at dawn
The expulsion of Sweden's ambassador comes just hours after the Nordic nation's embassy in Baghdad and setting it on fire before dawn on Thursday during a demonstration organised by supporters of the religious leader Moqtada al-Sadr.
Iraqi authorities condemned the attack on the embassy building, calling it a "security breach."
Iraqi riot police were deployed in large numbers, chasing down dozens of demonstrators that invaded the building and remained after the blaze broke out, according to journalists on the ground.
Smoke poured from the embassy building's roof during the morning.
Sweden announced on Thursday it had summoned the Iraqi ambassador's deputy over the incident.
"What happened is totally unacceptable and the government condemns these attacks in the strongest possible terms," Swedish Foreign Minister Tobias Billström said.
Embassy staff were unharmed, Sweden's foreign ministry told AFP news agency.
"We are aware of the situation. Our embassy staff are safe and the ministry is in regular contact with them," the ministry wrote in an email.
In the Iraqi capital, several vehicles were set on fire, with security forces using water canons and electric batons to drive demonstrators away from the embassy.
Protesters responded by throwing stones. Many brandished copies of Islam's holy book and portraits of Mohamed al-Sadr, an influential Shiite religious cleric and father of Moqtada al-Sadr, during the night.
The dispute comes after Swedish police authorised a controversial mini-rally in Stockholm on Thursday, organised by Salwan Momika.
The Iraqi refugee living in Sweden confirmed on his Facebook page he planned to burn a copy of the Quran as well as the Iraqi flag in front of the Iraqi embassy.
Momika already burned a few pages of a copy of the Quran on 28 June in front of the largest mosque in Stockholm, during the day of Eid al-Adha holiday celebrated by Muslims around the world.
This first incident prompted widespread condemnation from across the Islamic world.
"We mobilised today to denounce the burning of the Quran, which is only love and faith," said protester Hassan Ahmed in Baghdad.
"We demand from the Swedish government and the Iraqi government that this type of initiative cease."
The Iraqi Foreign Ministry on Thursday condemned "in the harshest terms" the fire at the Swedish embassy in Baghdad, calling on the security forces to open an "urgent investigation", according to a press release.
Burning the Quran has been used as a political stunt in Sweden and other European countries before, at times by the far-right.
It is considered by many Muslims as deeply offensive, inflammatory and some have called for the act to be outlawed, while others claim it should not be banned to maintain freedom of speech.