Karimi-Mashiani's bout was in the Polish city of Bydgoszcz on Saturday, in the 86-kilo category of the under-23 world championships, when he apparently intentionally lost to avoid facing an Israeli challenger.
Iran does not recognize Israel and bars its athletes from competing against Israelis at global competitions.
Karimi-Mashiani was on his way to a win over Russia's Alikhan Zabrailov and a showdown with the Israeli when his coach began shouting in Persian from the sidelines, "You must lose, Alireza!" The trainer then stopped the match to speak privately to the wrestler, who went on to lose the match.
Karimi, who was one of the favourites to win the title, is demanding the Iranian wrestling federation pay him the bonus of 60 gold coins (around $A26,600) he would have earned for victory.
The hashtag #youmustlose was trending Monday in Iran, with many comments also speaking out against his actions.
"Your noble and heroic action in the world competition in Poland, abandoning the medal and the podium in support of the highest human values, is a source of pride and praise", an official statement on the website of the youth and sports ministry said, addressing the young wrestler.
Alluding to how it was the second time he had taken such action, the Iranian Wrestling Federation said: "It is the second time that you have risen up against the oppression of the Palestinian people by abandoning your rights in an act of absolute submission".
Critics in Iran say the ban on competing against Israel has hurt the development of Iranian athletes, forcing them to forfeit or pull out of competitions in which they might face Israeli athletes.