Ardalan, 36, was honoured for "making the demand for equal rights for men and women a central part of the struggle for democracy in Iran," a statement from the Olof Palme Memorial Fund said.
The award is for outstanding achievement named after Palme, a popular Swedish prime minister who was gunned down by a lone attacker in February 1986, shortly after leaving a Stockholm cinema.
Created to promote peace and disarmament and combat racism and xenophobia, the prize consists of a diploma and 75,000 dollars.
Ardalan, a figurehead of the Iranian women's movement, was sentenced to three years in prison in April 2007 after being declared a threat to national security for criticizing the state of women's rights in Iran.
She has appealed the verdict and has yet to serve time in prison. Ardalan founded a cultural women's centre in the 1990s which in 2005 edited, under her leadership, the first online newsletter on women's rights in Iran, Zanestan.
She also started an international campaign aimed at gathering one million signatures in favor of gender equality.
The prize ceremony will be held on March 6 in Stockholm.
Former UN secretary general Kofi Annan and Sudanese human rights lawyer Mossaad Mohamed Ali shared the Olof Palme Prize in 2006, and Myanmar's imprisoned pro-democracy leader Aung San Suu Kyi won it in 2005.
Other past winners include former Czech president Vaclev Havel and human rights group Amnesty International.