Raoul Wallenberg "repeatedly put his own life at risk" to provide passports and safe shelter in diplomatic buildings to thousands of Jews in 1944, said Governor-General Quentin Bryce.
"I cannot think of a more appropriate and significant figure to welcome to our Australian family," she said. "Wallenberg's life is an example to all of us."
Wallenberg was arrested at the age of 34 by Soviet troops in January 1945. The date and nature of his death are not known. Some sightings of him in Soviet prisons as recently as the 1980s have been reported but others believe he died in 1947, The Sydney Morning Herald reported.
The title of honorary citizen does not give Wallenberg's descendants any status or entitlements in Australia, said a spokeswoman for Prime Minister Julia Gillard.
Wallenberg was previously made an honorary citizen of the United States, Israel, Hungary and Canada, the newspaper said.