Prime Minister Julia Gillard said the citizenship was "an expression of deep gratitude for all that our nation gained when so many saved by Wallenberg came to these shores".
"We are here today to celebrate something exceptional in the human spirit," she told a ceremony in Canberra.
"As the last witnesses to the horrors of World War II leave us, it is vital, it is imperative to keep alive the memory and example of individuals like Raoul Wallenberg."
Wallenberg, who was posted to Nazi-occupied Budapest in July 1944, is believed to have saved tens of thousands of Hungarian Jews in the final months of the Holocaust by providing them with protective passports.
He also acquired buildings to house as many Jews as possible and provide them with extraterritorial status.
Australia joins the United States, Canada, Budapest, and Israel in making Wallenberg an honorary citizen.
"Some of the individuals whose lives he redeemed became part of our first, great transforming wave of post-war immigration; among the first to pledge themselves to their new home after Australian nationality was formalised in 1949," Gillard said.
Mystery surrounds the fate of Wallenberg, who was last seen alive on January 17, 1945 as Soviet forces ousted German and pro-Nazi Hungarian troops.
The official Soviet account states that he died in prison in Moscow in 1947.