Both countries have also been divided over the nearly five-year war in Syria, where Iran is backing the regime and in Yemen where a Saudi-led coalition is battling Iran-backed rebels.
Saudi Foreign Minister Adel al-Jubeir made the announcement at a news conference in Riyadh, and said Iranian diplomats had 48 hours to leave the kingdom.
The diplomatic fallout come as Iran's supreme leader said Saudi Arabia would face "divine revenge" for executing Sheikh Nimr al-Nimr, and as Western nations voiced concern about escalating sectarian tensions between Sunnis and Muslims.
Saudi Arabia "is breaking off diplomatic ties with Iran and requests that all members of the Iranian diplomatic mission leave... within 48 hours," Jubeir said.
"Iran's history is full of negative interference and hostility in Arab issues, and it is always accompanied by destruction," he said, and accused Tehran of seeking to "destabilise" the region.
Note
On Saturday Jan 02,2016, a mob attacked the Saudi embassy in Tehran and a consulate in second city Mashhad amid protests at Nimr's execution
Iran has said it arrested 44 people over the embassy attacks, and President Hassan Rouhani said the demonstrators were "radicals" and the assaults "totally unjustifiable".
Jubeir said Saudi authorities had asked their Iranian counterparts to ensure security at the embassy but they did not cooperate and failed to protect it.
Nimr al-Nimr(56) was a force behind 2011 anti-government protests in oil-rich eastern Saudi Arabia, where Shiites have complained of marginalisation.
Nimr al-Nimr was put to death along with 46 other people, Shiite activists and convicted Sunni militants who the Saudi interior ministry says were involved in Al Qaeda attacks that killed dozens in 2003 and 2004.
Some were beheaded and others were shot by firing squad.
Iran's supreme leader Ayatollah Ali Khamenei condemned Nimr's execution, saying "God will not forgive" Saudi Arabia for putting him to death.
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