The match was a game of penalties, with more British heartache from the spot as they missed a whole host of them.
Iran were awarded two in the first half. The first was saved by Dan James in goal but the second was fired in off the post for a 1-0 lead.
After the goal, Britain were given one penalty inside the box and a further three eight-yard penalties.
However, the Iranian goalkeeper was in inspired form as he saved three of them and the fourth was missed by captain Dave Clark.
Britain needed to win by two clear goals in order to qualify but defeat means that Argentina and Spain will qualify from the group.