A magical effort from Emad Mohamed from 30 yards gave the Iraqis the much-needed boost they were looking for to resurrect their fortunes after two defeats and one draw that had condemned them to the bottom of Group 1.
Mohamed's tantalising 28th minute chip dipped into the goal with Australian goalkeeper Mark Schwarzer unable to anticipate its trajectory properly to give Adnan Hamad's Iraqis three points that took their tally to four.
Qatar and Australia are on top of the points table with seven each, while China are scraping the barrel on three after suffering a shocking defeat at home to Qatar on Saturday.
The Iraqis, who are based in Dubai because of the troubled situation back home, were never short of support in Dubai with thousands of expatriate workers thronging the stadium to cheer their heroes.
Australia hardly made any impression in the first half. Iraqi striker Younes Mahmood was a constant threat to the Aussie defence and Schwarzer was called into action several times before Mohamed's decisive strike.
Australia staged many moves but were unable to get even a single shot on the Iraqi goal in the first half as goalkeeper Noor Sabri was almost reduced to a spectator.
More of the same after the interval
Iraq continued to dominate proceedings in the second half and Schwarzer had to again come to Australia's rescue forcing a corner after foiling Nashat Akram in the 51st minute. In the 57th minute Jason Culina failed to trouble Sabri after a neat one-two with Brett Holman.
However, Sabri had to be at his best on the hour when Aussie skipper Harry Kewell neatly back-heeled to Holman whose cracking shot was saved by the Iraqi goalkeeper.
The only changes to the Socceroos starting line-up from last week against Iraq in Brisbane were Chris Coyne and Carl Valeri coming in for Scott McDonald and Mark Bresciano.
Australia had several half chances in the final stages but they failed to take advantage, with Sabri in the goal playing a vital part.
Iraq, the AFC Asian Cup champions, now have two matches remaining, against Qatar and China and victory against both could yet fetch them a spot in the next qualifying phase.