"The European Parliament is honouring these two people who are standing up for a better Iran," said parliament president Martin Schulz, calling for their immediate and unconditional release.
Iran "should know this institution stands on the side of those repressed by this regime," he said. "The Iranian people have earned the right to a regime that respects human rights and that is different to this regime".
Neither Panahi, currently under house arrest, nor Sotoudeh, who was thrown behind bars in August 2010, were able to collect the 50,000-euro ($65,000) prize, whose past winners include Nelson Mandela and Kofi Annan.
Sotoudeh, a 47-year-old mother of two, is a leading rights campaigner known for representing opposition activists and juveniles facing the death penalty.
After being sentenced to 11 years in January 2011 and banned from practising law for conspiring against state security, she launched a hunger strike in October to protest at her prison conditions and harassment against her family.
She ended the protest on Tuesday after 49 days, according to an Iranian lawmaker.
Panahi, 52, has been repeatedly acclaimed at major international festivals for gritty and socially critical movies that are banned in Iran.
He was arrested for a documentary he tried to make on the unrest following the 2009 election and after being placed under house arrest and banned from making films for 20 years. He was later sentenced to jail for six years but remains detained at home for the moment.
"There is no accountability in this country," said Schulz, speaking before two empty chairs symbolising the plight of the Iranian prize-winners.
Panahi, who was represented by his daughter Solmaz and Franco-Greek film-maker Costa-Gavras, was "an exceptional talent" who "never chose the easy route," Shulz said.
Sotoudeh, who was represented by Iranian Nobel peace laureate Shirin Ebadi, was a "brave and creative" rights fighter. "Free her immediately and without condition from this shameful imprisonment."
In written acceptance speeches, Sotoudeh said: "I have only one dream: the dream of the realisation of justice and I believe that this dream will be realised in my country, by juridical independence."
Panahi asked "Why do the governments, the almighty and powerful, become more intolerant every day? History is the narrative of the few, making the lives of the many miserable, while using the most unacceptable excuses: difference of sex, language, religion or political ideas."