Bahman Golbarnezhad, 48, fell during the event and died of his injuries despite an attempt to take him to the hospital for treatment, officials said.
“He unfortunately passed away,” International Paralympic Committee (IPC) spokesman Craig Spence told AFP.
Golbarnezhad’s accident occurred during the more than two-hour C4-5 road race for athletes with varying disabilities but still able to bicycle.
He was in the first section of a mountainous descent when he fell.
“The athlete received treatment at the scene and was in the process of being taken to the athlete hospital when he suffered a cardiac arrest,” the IPC said in a statement.
“The ambulance then diverted to the nearby Unimed Rio Hospital in Barra where he passed away soon after arrival.”
Paralympic officials said Golbarnezhad’s family in Iran had been informed and the Iranian team was also told the news during a meeting at the Athletes’ Village.
The cyclist, who wore a prosthesis on his left leg, took up the sport in 2002 and competed at the London 2012 Paralympics.
“This is truly heart-breaking news,” IPC president Philip Craven said.
“The Paralympic Family is united in grief at this horrendous tragedy, which casts a shadow over what have been great Paralympic Games here in Rio.”
Brazil’s top official for the Rio Olympics and Paralympics, Carlos Nuzman, called it “very sad news for sport and for the Paralympic movement. Our hearts and prayers are with Bahman’s family, his teammates and all the people of Iran.”
The Iranian flag was lowered to half-mast in the Paralympic Village, while the Paralympic flag was to be at half mast during Sunday’s sitting volleyball gold-medal match between Iran and Bosnia and Herzegovina.
A minute of silence will be held during Sunday’s closing ceremony.
Iranian Paralympic officials did not immediately respond to a request for comment.
The British Paralympic team tweeted: “We are devastated by the news of Bahman Golbarnezhad’s passing. Our thoughts are with our friends and colleagues from NPC Iran.”