The Macedonian shot-stopper, 25, has been with the Premier League side since he was 18 but not made an appearance for the first team.
Iliev, who stands at 6ft 5in, has previously had loan spells with ŠKF Sereď in Slovakia and Polish top flight outfit Jagiellonia Białystok. He was Arsenal's third goalkeeper in the matchday squad for the 2019 Europa League final against Chelsea.
He becomes the seventh loanee in at Montgomery Waters Meadow, where he will rival Harry Burgoyne for the No.1 spot in Sam Ricketts' side while Wolves loanee Sarkic is missing with a hamstring injury.
Iliev was capped five times at Macedonia under-19 and under-21 level and is understood to come highly rated from Town goalkeeper coach Brian Jensen.
Ricketts said: “Deyan has been at Arsenal for a number of years. He’s also made his way up the age groups with Macedonia as well – he’s got good pedigree.
“He’s been out on loan in Poland and Slovakia so he is someone we are delighted to get. He brings more competition for the goalkeeping spaces. With Mati getting injured, it left us light.
“We were keen to get another goalkeeper in and we are looking forward to working with him and working together."
Montenegro international Sarkic injured his hamstring in the recent draw at Plymouth Argyle and will be sidelined for three months.
Ludlow-born Burgoyne has filled in and impressed at Home Park and was minutes away from a clean sheet at home to Gillingham last weekend before Town were stung by a late equaliser.
If selected Iliev will be the third senior goalkeeper used by Town this season.
Iliev has recently been called up to the North Macedonia squad for international duty.