The six Gulf Cooperation Council states have condemned Tehran for opening offices on disputed islands in the waters between Iran and the UAE.
Abu Musa and the Greater and Lesser Tunb islands are controlled by Iran but claimed by the United Arab Emirates (UAE) with broad Arab support.
Iran says the two administrative offices on Abu Musa are to help ship registration and maritime rescue.
The GCC statement interfered with its internal affairs, a spokesman said.
Correspondents say the GCC fears the move will give Iran greater control of shipping traffic through the Strait of Hormuz, the waterway used by tankers carrying oil from the Gulf out into the open sea.
"The ministerial council condemns Iran's establishment of two administrative offices on Abu Musa island that belongs to the UAE and demands that Iran remove these illegal installations and respect the UAE's sovereignty on its land," the GCC statement read.
Iran took control of the islands in 1971 when Britain granted independence to its Gulf protectorates.
The UAE has repeatedly proposed resolving the dispute through direct negotiations or arbitration, but Iran has always refused.
"All our country's measures on Abu Musa island are completely legal and in accordance with Iran's rights governing this Iranian island," foreign ministry spokesman Hassan Ghashghavi said in a statement.