About 60 people were arrested.
Police said no Iraqi diplomats had been in the building in central Tehran since Thursday. About a dozen police were guarding the embassy Friday, too few to hold back the angry crowd.
"No Saddam! No U.S. puppet regime! We want freedom!" the crowd chanted as it smashed windows, furniture and the Saddam portraits. The scene was similar to television images from Baghdad in recent days showing Iraqis storming government and ruling party offices and destroying other symbols of Saddam and his regime.
About 40 minutes after the crowd broke in, police reinforcements arrived and sealed the embassy compound in northern Tehran. Some of those arrested flashed the victory sign as they were being driven away.
Police officers prevented the crowd of Iraqis from leaving the embassy and confiscated documents. Police also closed streets around the diplomatic mission.
"We are destroying some properties at the embassy because they represent evil," said one of the Iraqis, Adibeh Tabrizi. "We will take care of the building and we will not damage it, but we are destroying any sign of the criminal regime."
Another Iraqi, Rana Ashia, had tears in her eyes as she ripped up pictures of Saddam inside the embassy.
"Two of my brothers have been in Iraqi jails for 23 years. Today is the biggest victory of the century for us, to see the criminal Saddam Hussein and his regime collapsing," she said.
At other Iraqi embassies, diplomats have been seen burning documents since it became clear that Saddam had lost control of his capital. Iraqi diplomats have been accused of gathering intelligence on Iraqi citizens living abroad and even plotting attacks on Iraqi dissidents.
There are about 200,000 Iraqis living in Iran, many of them Shiite Muslims who fled after a failed Shiite uprising against Saddam in 1991 at the end of the Gulf War. Tens of thousands of the Iraqis in Iran live in the capital.
Wednesday, about 60 members of an Iraqi opposition group took over the Iraqi interest section at the Jordanian Embassy in London. Scotland Yard said those demonstrators were quickly cleared from the building, and police arrested two dozen people for offenses including criminal damage.