The reformist Ghanoon daily did not appear on newsstands in Tehran on Thursday after the judiciary accused it publishing false reports and shut it down.
Ghanoon, meaning "law" in Persian, is the latest victim of ever-increasing bans being slapped on the media despite President Hassan Rouhani vowing to ease such restrictions when he took office in August.
According to the prosecutor's office, the daily's coverage of the arrest of Mohammad Royanian, a former police and government official, was deemed inappropriate.
"The newspaper published false reports aimed at disturbing public opinion, and (articles) against the Islamic values," read the prosecutor's statement, carried on the Ghanoon website.
It did not elaborate.
According to media reports, Royanian has been arrested on charges of financial fraud related to his tenure as head of Iran's Fuel and Transport Management Organisation.
Reacting to the action against Ghanoon, outspoken lawmaker Ali Motahari urged the Rouhani administration to stop banning the media, the reformist Sharq daily reported.
Rouhani, a reputed moderate who was elected last June, has pledged to work for more cultural and social freedom. But he is facing opposition from conservatives in the Islamic republic.
The judiciary has already permanently banned two reformist papers as well as serving temporary bans on pro-reform and conservative newspapers.