Julie Bishop is Australia's highest-ranking official to visit Iran in 12 years and she discussed the conflict in Iraq with her Iranian counterpart Mohammad Javad Zarif.
Australia is part of an international coalition in Iraq and has 500 troops deployed there.
Iran, though not part of the coalition, has run a parallel campaign using Shiite militias and military advisers to reverse the IS surge that came close to felling the Baghdad government last June.
"Both countries can contribute in the fight against this terrorist organisation and put an end to the misery of the people in Iraq," she said, referring to Iran and Australia's efforts.
Iraq needs "a strong and stable government" added Bishop, who along with Zarif said Australia and Iran were in Iraq at the request of the Baghdad government in fighting IS.
"The fight against Daesh and terrorism in Iraq should be managed by the Iraqi government," Zarif said. "Anything we do in Iraq is in coordination with the Iraqi government."
Her trip comes after Iran and world powers reached a political framework on April 2 for a deal to end the standoff over Tehran's nuclear programme. A comprehensive agreement is due by June 30.
But in Australia public concern towards Iran has focused on asylum seekers. Iranians make up 23 percent of 1,848 people held in immigration detention centres in Australia, according to official figures from late March.
Australian Prime Minister Tony Abbott also raised the subject last week, noting: "We will be talking to the Iranian government about taking back people who are... Iranian citizens, because they deserve to be in Iran. They belong in Iran."
"We discussed the challenge we have been facing these recent years of people in the smuggling trade. We agreed to continue these discussions at consular level," Bishop said.
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