Iraqi clubs banned from Asian competition
World governing body FIFA banned Iraq in November after political interference in the running of the country's Football Association.
The AFC had given the Iraqi FA a January 6 deadline to resolve the issues or face expulsion from the second-tier Asian club competition.
"It is with deep regret that Iraqi clubs cannot participate in the AFC Cup 2010," AFC president Mohamed Bin Hammam told the AFC website on Thursday.
"We, however, gave our best efforts in supporting the Iraq FA in trying to ensure that their teams played in the competition."
The suspension of the two clubs meant that Qatar's Al-Rayyan and Uzbeki's Nasaf are promoted into the group stages, which begin next month.