The other two seats went to Mexico, which will represent Latin America, and Uganda, which will represent Africa; both ran unopposed.
Kadima Chairman Tzipi Livni lauded the decision, congratulated Japan for being elected, and added that "Iran's very candidacy was unthinkable."
Livni added that the UN averted disgrace by preventing Iran from joining the Security Council, stressing that international activity vis-à-vis Iran and the threat it represents "must continue at all levels and with greater force."
Iran receives 32 votes
General Assembly President Miguel d'Escoto Brockmann said after the balloting that Austria received 133 votes, Turkey 151 votes, Japan 158 votes, Uganda 181 votes and Mexico 185.
Iran received only 32 votes from the U.N. members, Iceland, which had been considered by many to be a strong candidate until the recent economic crisis, received only 87 votes.
The five new non-permanent members of the council will serve two-year terms.
Ten of the council's 15 seats are filled by the regional groups for two-year stretches. The other five are occupied by its veto-wielding permanent members: Britain, China, France, Russia and the United States.
The five countries elected to the Council will take their seats on Jan. 1, 2009, replacing Belgium, Indonesia, Italy, Panama and South Africa. The five countries elected last year - Libya, Vietnam, Burkina Faso, Costa Rica and Croatia - will remain on the Council until Jan. 1, 2010.
Attila Somfalvi contributed to the story