Meant to be a response to the Danish cartoons of Islam's Prophet Muhammad that sparked rage among Muslims around the world, the exhibit appears inspired by Iranian President Mahmoud Ahmadinejad's tirades calling for Israel to be destroyed.
Tehran has several times announced plans to host a conference to examine the scientific evidence supporting the Holocaust, dismissing it as exaggerated. Its most recent announcement came in September during Annan's visit to the Iranian capital, where he said he discussed the cartoon show with officials.
Abdollah Derkaoui received US$12,000 for his work depicting an Israeli crane piling large cement blocks on Israel's security wall and gradually obscuring Al-Aqsa Mosque in Jerusalem. A picture of Nazi Germany's Auschwitz concentration camp appears on the wall.
The mosque is Islam's third holiest site.
Tehran Museum of Contemporary Arts, next to the Palestinian Embassy, which was the Israeli diplomatic mission before the 1979 Islamic Revolution.
The exhibit curator, Masoud Shojai, said the contest will be an annual event.
"Actually, we will continue until the destruction of Israel," he said.
The display, comprising 204 entries from Iran and abroad, opened in August.
Carlos Latuff from Brazil and A. Chard from France jointly won the second prize of US$8,000 and Iran's Shahram Rezai received US$5,000 for third place.
Many Muslims considered the cartoons published by the Danish newspaper Jyllands-Posten a violation of traditions prohibiting images of their prophet.
The Tehran daily Hamshahri, a co-sponsor of the exhibition, said it wanted to test the West's tolerance for drawings about the Nazi killing of 6 million Jews in World War II. The entries on display came from nations including United States, Indonesia and Turkey.