Shin Bet said it was the latest in a series of attempts by Tehran to recruit Israelis and gain intelligence.
A statement said that seven nationals from the north of the country were arrested after an investigation found they had gathered information about military bases and energy and port infrastructure.
Israeli police said the breach was among the most serious seen by Israel.
A source within the Shin Bet security service said: "The activity of the members of the ring has caused damage to the security of the state."
Iran's foreign ministry was not immediately available for comment.
But it is understood that the suspects who include two minors - had been tasked by agents from Tehran's intelligence service to carry out hundreds of information-gathering tasks on military bases across the country.
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