Karim finished as the Dervishes top scorer this season with 11 league goals, only one goal adrift of Ahli's Flavio Amado.
But the 21-year-old's fine campaign was not enough for Iraq boss Bora Milutinovic, who preferred to rely on a number of Gulf-based strikers.
Holding midfielder Qusai Mounir was ruled out due to a knee injury.
Iraq will kickoff their Confederations Cup campaign against host nation South Africa on June 14th.
Iraq Squad
Goalkeepers: Mohammed Kasid (Al-Zawraa), Nour Sabri (Talaba), Uday Talib (Duhok)
Defenders: Basim Abbas (Talaba), Muayad Khalid (Al-Quwa Al-Jawiya), Isam Yaseen (Duhok), Samir Saeed (Arbil), Farid Majeed (Talaba), Salam Shaker (Al-Khor, Qatar), Ali Hussein Rahema (Al-Wakra, Qatar), Mohammed Ali Karim (Al-Jazeera, UAE);Dara Mohammed Habeeb (Arbil)
Midfielders: Halgurd Mulla Mohammed (Sulaymaniya), Mahdi Karim (Al-Khor, Qatar), Nashat Akram (FC Twente, Holland), Hawar Mulla Mohammed (Anorthosis Famagusta, Cyprus), Abdul-Wahab Abu Al-Hail (Sepahan Isfahan, Iran), Salih Sadir (Al-Ahed, Lebanon)
Strikers: Karrar Jassim (Al-Wakra, Qatar), Emad Mohammed (Sepahan Isfahan, Iran), Alaa Abdul-Zahra (Al-Khor, Qatar), Younis Mahmoud (Al-Gharafa, Qatar), Luai Salah (Al-Wahda, UAE).