FILE PHOTO: Iranian Foreign Minister Hossein Amir-Abdollahian. AP
"The Council of Ministers has decided on the severance of diplomatic relations with the Islamic Republic of Iran with immediate effect," said Rama.
Rama accused Iran of directing a cyberattack against Albanian institutions on July 15 in a bid to "paralyse public services and hack data and electronic communications from the government systems".
"The said attack failed its purpose. Damages may be considered minimal compared to the goals of the aggressor. All systems came back fully operational and there was no irreversible wiping of data," Rama added.
The prime minister went on to say that Iranian diplomats and support staff had 24 hours to leave the country following the announcement.
Albanian and Iran have been bitter foes for years, stemming from Tirana's hosting of Iranian opposition group the People's Mujahedeen of Iran (MEK) on its soil.
Albania agreed in 2013 to take in some 3,000 members of the exiled Iranian opposition group at the request of Washington and the United Nations.
The MEK backed Ayatollah Ruhollah Khomeini in the 1979 revolution that ousted the shah but rapidly fell out with the new Islamic authorities and embarked on a campaign to overthrow the regime.