Osieck, a former Canadian national team coach, made the surprising decision to take off talisman Tim Cahill and replace him with Kennedy, and the decision paid dividends when Mark Bresciano chipped a cross into the box, where the tall striker took advantage of lax marking to head past Noor Sabri in the Iraq goal.
The goal sparked euphoria among the sodden but exultant home crowd of 80,523, curing the heightening anxiety among fans as the minutes ticked by without Australia being able to find a way through Iraq's defence.
A draw would have left Australia at the mercy of the outcome of the Jordan-Oman game later in the day, with a likely relegation to third place in the group and a further playoff round.
Instead, Kennedy's goal meant Australia qualified directly for its third straight World Cup, and becomes the third team to book its place for the 2014 tournament after Japan and host Brazil.
"I'm proud of everybody," said captain Lucas Neill "It's been a really tough campaign. We've stuck at it, showed mental strength.
"Sorry, it wasn't pretty. But we've beaten what was in front of us and pushed ourselves on to a very exciting tournament."
The Socceroos won just one of their first six games in the final stage of Asian qualifying, putting their Brazil ambitions in jeopardy, but home wins over Jordan and Iraq delivered a place in Brazil for the veteran squad, which includes Bresciano, Mark Schwarzer, Lucas Neill and Cahill in the twilight of their careers.
"It was a very tough qualifying campaign but we made it happen in the last three games," Osieck said.
"It was a tricky game. They are not an easy team to play"
Australia started the game positively and fired the first salvo in the 3rd minute with Tim Cahill stinging the palms of Iraqi keeper Abbas Noor's goal from 10 yards, after some clever build up play from winger Robbie Kruse.
In the 15th minute Sasa Ognenovski spurned a good chance when he headed over the bar from fellow central defender Lucas Neill's chipped cross.
On the half hour, Cahill again found the target but his weak header from Luke Wilkshire's corner was easily saved by Noor.
Three minutes later Australia countered after a rare Iraq attack with Tommy Oar's lofted pass playing in Cahill, but the New York Red Bulls star could only drag his effort wide from a tight angle.
A better chance for Cahill presented itself on the next Australian foray with McKay's cross fumbled by Noor and Cahill's acrobatic overhead kick sailed just wide from seven yards.
Iraq came more into the game late in the first half as Australia's early dominance ebbed away, with the hosts unable to unlock Iraq's defence and ending the half without the goal it needed to book its place for the World Cup.
Iraq, missing several of its best players, managed just one shot in the opening half which failed to test Schwarzer.
The former Asian champions qualifying hopes ended last week in a defeat to already-qualified Japan in Doha, and missed captain and striker Younis Mahmood and veteran midfielder organizer Nashat Akram, who didn't travel to Australia.
The visitors started the second half brightly with midfielder Saif Salman forcing Schwarzer to dive to his left to stop his low drive from 25 yards.
In the 57th minute, Bresciano shot narrowly over from just outside the box as the hosts looked to up the pressure on the Iraq backline.
Bresciano went close again two minutes later when he combined with Kruse but his tame effort was easily collected by Noor.
Australia named an unchanged lineup for the third successive game after an impressive 1-1 draw away to Japan and a 4-0 rout of Jordan in Melbourne last week.
On the hour Australia coach Holger Oseick brought Glasgow Celtic's Tom Rogic for Brett Holman and the change almost paid immediate dividends with Rogic bursting into the box, but saw his shot fly wide.
Australia thought they had the breakthrough in the 65th minute, but Kruse's volley from outside the box was disallowed by Iranian referee Faghani Alireza who saw a foul by Ognenovski in the lead up to Kruse's well taken strike.
Australia continued to press but couldn't find the breakthrough, prompting Osieck to substitute Cahill for Nagoya Grampus striker Kennedy.
Cahill was less than impressed with the decision, storming past the German coach to take his place on the bench, but the substitution proved insired.
The hosts survived some nervous final minutes as Iraq pressed forward but managed to hold on.