It would be an absolutely suicidal act for Iran (well, for Iran's people, perhaps not the leadership.) I think that Israel would reply with a massive nuclear strike of their own, though I'm not sure what the US response would be in such a situation, perhaps support for Israel and diplomatic pressure on other powers.
I think it would have terrible consequences for the world if anyone dropped a nuclear bomb, but the worst would be the unrest in the Middle East. The region is already very unstable. I can only imagine what would happen, but it would not be good!
It can't lead to WWIII because Iran lacks allies. It's not like in WWI or WWII where you have two pretty big alliances that line up and take sides. If Iran were to nuke Israel without it being in self-defense, there would not be much in the way of major powers that would side with Iran. I'm thinking the retaliation by the US and Israel would be massive and that Russia and China would pretty much stand aside and let it happen.
First Iran would need nukes...