"The lives of those he rescued are Mr. Wallenberg's greatest memorial and Australia is honored to have survivors he rescued living in Australia today," Prime Minister Julia Gillard said in a statement.
"The award of honorary Australian citizenship is symbolic recognition of Mr. Wallenberg's tireless devotion to human life during the Holocaust."
The recognition was made to mark the centenary year of Wallenberg's birth.
He was posted to Nazi-occupied Budapest in July 1944 and rescued thousands of Hungarian Jews by issuing them protective passports in the final months of the Holocaust.
Wallenberg, then 32, also acquired buildings to house as many Jews as possible and provide them with extraterritorial status.
He was last seen alive on January 17, 1945 as Soviet forces ousted German and pro-Nazi Hungarian troops. Mystery surrounds his fate but according to the official Soviet account he died in prison in Moscow in 1947.
"This is the first time that Australia has bestowed such an honor," said Gillard, with Australia joining the United States, Canada, Budapest and Israel who have already made him an honorary citizen.