Tensions surged on Saturday when Saudi Arabia executed a leading Shiite cleric and activist, Sheikh Nimr al-Nimr.
The deepening crisis between Saudi Arabia and Iran could threaten fragile efforts to negotiate an end to the Syrian war, which has claimed more than a quarter of a million lives, analysts say.
"The conflict between Iran and Saudi Arabia will definitely have a negative impact" on the peace process, said Samir Nashar, a member of the Syrian opposition-in-exile.
"The negotiations were already difficult, if not impossible, and this conflict is only going to lead to positions becoming more entrenched," he told AFP.
On opposite sides of the Sunni-Shiite faultline in Islam, Iran and Saudi Arabia are also key players in the Syrian conflict, respectively backing or opposing the regime in Damascus.
Tensions surged on Saturday when Saudi Arabia executed a leading Shiite cleric and activist, Sheikh Nimr al-Nimr, prompting furious crowds in Iran to set fire to the Saudi embassy in Tehran and its consulate in Mashhad.
In response, Saudi Arabia severed ties with Iran on Sunday, giving Iranian diplomats 48 hours to leave the country.
This was followed on Monday by Bahrain and Sudan cutting ties with Tehran, while the United Arab Emirates downgraded its links with Iran, recalling its envoy.
The bustup is the result of years of seething hostility between the Persian and Arab rivals, who have fought for leadership of the region through proxy wars in Iraq, Lebanon and Yemen, where Riyadh is directly involved militarily in the fight against Shiite Huthi rebels.
Both countries are also deeply involved in the war in Syria, where Iran supports President Bashar al-Assad and has supplied "military advisers" to his regime.
The Saudis have called for Assad to go and are giving financial and military support to rebel organisations that include fundamentalist groups.
In Syria, the Saudi-Iranian rivalry "has been one of the driving factors from the start", said Yezid Sayigh of the Carnegie Middle East Center.
As 2015 came to a close, tentative efforts to broker peace in Syria appeared to have had a glimmer of success.
But this latest crisis threatens to derail the process, commentators said.
Noah Bonsey, senior analyst at the International Crisis Group, said the deterioration in relations "will further diminish already low expectations" for talks expected to take place in late January.
"Ultimately, reaching a political resolution in Syria would require key states backing each side to make reciprocal concessions, and pressure their Syrian allies to do the same. For now, things are moving in the opposite direction," said Bonsey.
At talks in Vienna in October and November, all the players in the conflict gathered around the same table for the first time.
Western diplomats noted the barely-concealed animosity between the Saudis and the Iranians at those discussions.
But, one diplomat said brightly, "at least they are talking to each other".
That, however, was before diplomatic ties were severed.
The Vienna parlay broke ground by drawing up an international roadmap, which was unanimously adopted by the UN Security Council on December 19.
It foresees talks between the different sides in January, the establishment of a transitional government within six months and elections within 18 months in a plan supported by Iran and Russia, which also backs Assad.
"We made progress by getting all the protagonists back to the negotiating table, and the UN resolution showed the commitment of the international community. It is essential we keep up the negotiations, but the process has just been weakened," said a source deeply involved in the negotiations, speaking on condition of anonymity.
Karim Bitar, a researcher at the IRIS think-tank in Paris, pointed out that the conflict between Riyadh and Tehran only adds to tensions that had already mounted with the death of influential Syrian rebel chief Zahran Alloush, killed in a regime air strike in late December.
"This escalation is going to make any chance of progress on Syria more complicated," Bitar said.
Realising that the peace process now hangs in the balance, the United States, France, Germany and Italy have all called for calm.