A victory for Iran would have cemented their passage to the quarter-finals but first-half goals from Kang Nam-gwon and Jong Kwang-sok secured victory for DPR Korea, who are now level on four points with Syria but ahead of the West Asians on goal difference.
The win was tinged with disappointment, however, with defender Kim Chol-bom sent off for a reckless challenge late on.
With the match pitting together two sides expected to do well at the tournament it was unsurprising that they cancelled each other out during the early exchanges.
But DPR Korea started to get the measure of the Iranian's defence and fired a warning shot after 13 minutes when Choe Myong-song's low drive was just wide of the left upright.
They were ahead seven minutes later though when Kang raced onto a ball into the area and, surrounded by defenders, lashed a powerful shot that gave keeper Masoud Alizadeh no chance.
Armin Naserinejad cleared a shot off the line from a goalmouth scramble as the East Asians pressed for a second and such was DPR Korea's attacking strength that Iran boss Akbar Mohammadi opted to bolster his beleaguered defence with the 26th minute introduction of defender Milad Kanani for midfielder Saeid Aghaei.
But it did little to stem the tide of attacks and instead DPR Korea increased their lead just after the half hour when skipper Jang Ok-chol was fouled 20 yards from goal and Jong expertly curled a free-kick over the wall and into the net.
Jang shot over the bar less than a minute into the second half before Jong attempted to repeat his goal scoring free-kick from earlier but this time Iran keeper Alizadeh was well placed to hold onto the shot.
Iran may have been struggling to break down DPR Korea but they almost halved the deficit with a fine opportunistic strike from skipper Ali Fathian, who hit a shot with the outside of his boot in the 70th minute that bounced off the crossbar.
Ju Jong-chol headed straight at Alizadeh when well placed soon after but things took a bad turn for DPR Korea nine minutes from time when influential defender Kim was shown a straight red card for a foul on the edge of the area.
Fathian struck the resulting free-kick well enough but keeper An Kang-chol was equal to the effort, punching the ball behind for a corner.
Iran dominated the remaining minutes but DPR Korea defended in numbers to repel the attacks and protect the victory.