US Ambassador to Germany Richard Grenell said weeks of negotiations with the Trump administration have ended with Volkswagen agreeing to comply with the sanctions, except in humanitarian circumstances.
Mr Grenell said: “Volkswagen has told us they will comply with US sanctions on Iran.
“We are pleased with this decision because Iran diverts its economic resources away from its people to spread violence and instability across the globe.”
Volkswagen now joins the ranks of European companies like Total, Adidas and Daimler who have said they will scale back or abandon all operations in Iran.
In May, the US President pulled out of the Joint Comprehensive Plan of Action, which was agreed by the Obama administration in 2015.
The Iran nuclear deal lifted crippling economic sanctions in return for Tehran limiting its nuclear activities and allowing international inspectors to examine its nuclear sites.
The deal originally involved the US, UK, France, China, Russia and Germany, but Trump has decided the US will no longer abide by the rules.
President Trump warned other countries they will have to choose between doing business with the US or Iran.
Despite the US departure, the European nations have made efforts to keep the deal alive, an endeavor that is somewhat undercut by the latest move.
It will now be harder for those remaining in the agreement to convince Iran the deal is still worth it.
A senior State Department official said that the US has essentially won its battle to persuade companies to leave.
Volkswagen announced in July 2017 that it planned for sell cars in Iran for the first time in 17 years, taking full advantage of the removal of sanctions that accompanied the signing of the nuclear deal.
It made a deal with local importer Mammut Khodro to offer the Tiguan compact SUV model as well as others in dealerships in and around Tehran.
Volkswagen board member Andreas Renschler, who oversees the commercial vehicle unit, announced on Tuesday his division had suspended plans to expand to Iran.
Volkswagen were not immediately available for comment.