Video posted on social media shows Hamid Sotounzadeh being tackled to the ground and restrained by police in Canberra.
The first-person video shows a police officer and Mr Sotounzadeh yelling at each other, before the officer tells the protester to get back.
It then shows Mr Sotounzadeh replying, "No, I am standing here, this is my right", before he is tackled.
A subsequent video posted to Instagram shows Mr Sotounzadeh in a hospital bed with a neck brace.
He then opens both his hands, with words written in pen: "I will be back next week" and "IRGG (Islamic Revolutionary Guard Corps) terrorists".
Mr Sotounzadeh's friend Ali Beikzadeh, who was at the scene, told AAP legal action was being considered for what he described as "an illegal arrest".
He said his friend was left with fractures in his lower back, neck and ribs.
Mr Beikzadeh said it was suspicious his friend was arrested on the anniversary of the 44th Islamic Republic revolution despite peacefully protesting for the past 16 weeks.
"The reason why they did it yesterday is exactly the question that's on the minds of all of us," he said.
The Australian Federal Police said a person outside the embassy was detained for a short time after acting in an "aggressive manner towards the AFP members".
A spokesperson said the person was initially handcuffed but released after they complained of back pain. An ambulance was called.
"The AFP is aware the man has alerted the media that he has sustained injuries during his arrest," the spokesperson said.
"The AFP is seeking to ascertain the veracity of those claims and has referred the incident to the AFP's internal integrity unit, Professional Standards, for investigation."
The spokesperson said while the police acknowledged the right to peacefully protest, officers would take action "when individuals put themselves or others in danger, break the law or fail to follow the direction of police".
A spokesperson for Attorney-General Mark Dreyfus told AAP advice about the incident had been sought from the AFP.
Greens senator David Shoebridge said the arrest was "needlessly brutal".
"After seeing the footage I can say there needs to be an urgent independent investigation of this violent arrest by AFP officers," he posted on Twitter.
"What makes this incident even more troubling is that the Australian Iranian community is protesting appalling state violence in Iran and are then met by violent police action on the streets of Canberra."
Senator Shoebridge said members of Australia's Iranian community had been asking police to protect them from threats and intimidation from agents of the autocratic state.
"Yet this incident will make them question whose side the AFP is on," he said.
Mr Sotounzadeh has been protesting outside the embassy for 16 weeks after the death of 22-year-old woman Mahsa Amini in Iran at the hands of the nation's morality police for not correctly wearing her headscarf.
Her death triggered widespread protests both in Iran and around the world, with women tearing off their headscarves and cutting their hair to protest the strict theocratic regime.
Lifeline 13 11 14
beyondblue 1300 22 4636
12°C