Iniesta fired home the winner when he was put through in the area by Cesc Fabregas. Keeper Maarten Stekelenburg dived to his right and got a hand to the ball he could not keep it out.
The defeat was heartbreaking for the Dutch, who were down to 10 men after John Heitinga was sent off in extra time. It was their third World Cup final loss after 1974 and 1978.
European champions Spain had looked the more assured early on in the clash at Soccer City as a nervous-looking Dutch side ceded territory to their slick opponents.
Stekelenburg was forced into a save after five minutes when Sergio Ramos headed a Xavi cross goalwards while Spain forward David Villa crashed a volley into the side netting with the goal looming.
But a series of freekicks and bookings, including two strong challenges by Dutch midfielders Nigel de Jong and Mark van Bommel, shook Spain out of their rhythm and stopped them from producing the swift-passing game that got them to the final.
Netherlands offered little in attack and the nearest they came to a first-half goal was a bizarre incident when Gregory van der Wiel attempted to give the ball back in an act of sportsmanship.
The fullback's 60-metre punt bounced up and over Spain captain Iker Casillas, forcing the startled keeper to leap and tip it to safety.
The game continued with frequent stoppages and few chances, until Wesley Sneijder split the Spanish defence with a perfectly-weighted ball into the path of Arjen Robben after 62 minutes only for Casillas to save brilliantly with his feet.
In a lively end to normal time Villa had a shot blocked in front of the line, an unmarked Ramos headed wildly over the bar from five metres out and Puyol was lucky to escape punishment after hauling down a furious Robben.
In extra time it was Stekelenburg's turn to save with his feet when substitute Fabregas was sent clear by Iniesta.
Netherlands had to play with 10 men for the last 10 minutes of extra time when John Heitinga was sent off for hauling down Iniesta on the edge of the box.
The little midfielder got back on his feet and soon after was celebrating scoring the winning goal in the World Cup final to send the delighted Spanish fans into raptures.
Winner : Spain
Runners-Up : Netherlands
Third : Germany
Fourth : Uruguay
Award from World Cup :
adidas Golden Ball = adidas Golden Ball award
adidas Golden Boot = adidas Golden Shoe award
adidas Golden Glove = adidas Golden Glove award
FIFA Fair Play award
Last Man of the Match = Man of the Match
Best Young Player Award