Flynn called the launch the latest in a series of provocative moves by Iran that have included backing Houthi rebels in Yemen, who have attacked US allies.
"As of today, we are officially putting Iran on notice," Flynn said from the White House briefing room.
Flynn did not say whether the US would take action beyond a verbal warning, and three senior administration officials, speaking on background, said Wednesday that they are still in the early stages of determining what action the US should take in response.
"We are considering a whole range of options. We're in a deliberative process," one of the officials said.
Those options include financial measures and economic sanctions, and the officials said the administration would not take any options off the table, including a military response. They also stressed that a violation of the UN Security Council Resolution on Iranian ballistic missile activity would not impact the Iran nuclear deal.
One of the officials said Flynn's warning on Wednesday delivered from the White House -- one that might typically be issued by diplomats -- was intended to reflect "the level of importance that this administration believes this issue warrants."
Iran's Foreign Ministry insisted Tuesday that Sunday's missile test was "solely for defensive purposes," and not a violation of the UN Security Council resolution which bars Iran from testing "ballistic missiles designed to be capable of delivering nuclear weapons."
President Barack Obama's administration one year ago enacted financial sanctions on 11 people and companies involved in Iran's ballistic missile program after the country conducted two test launches of ballistic missiles.
That came after the UN determined in late 2015 that those launches were in violation of the Security Council resolution. The UN Security Council Resolution is not part of the Iran nuclear deal, but a separate security council measure.
Flynn did not signal whether the US would take any concrete actions -- military or diplomatic -- to counter what he described as "provocative" Iranian actions, but he did criticize the Obama administration for having "failed to respond adequately to Iran's maligned actions."
Flynn added that Iran's actions threaten stability in the region and place American lives at risk, and said Iran was "on notice."
"The Trump administration condemns such actions by Iran that undermine security, prosperity and stability throughout and beyond the Middle East and place American lives at risk," he said.
White House press secretary Sean Spicer added Wednesday that the US won't "sit by and not act on those actions."
Flynn's warning comes as forces from the US, British, French and Australian navies engage in exercises in the Persian Gulf.
A total of 17 warships from the four nations are participating in the exercises, named Unified Trident, led by the UK's amphibious assault ship HMS Ocean, according to a US Navy press release.
The drills are designed to "ensure the free flow of commerce" through waterways of strategic interest to the entire world, the US Navy release said.
The commander of Iran's navy, Rear Adm. Habibollah Sayyari, warned the four navies not enter Iran's territorial waters, according to a report from state-owned Press TV
Iran's Defense Minister Brig. Gen. Hossein Dehghan referenced the new US administration in telling Iran's independent Mehr News Agency
the allied exercise would not be successful.
"Under the situation created in the wake of the presidency of Donald Trump, Persian Gulf littoral states are somehow concerned about the future and the European countries are interested in cementing their presence in the region and giving some form of reassurance to their allies," Dehghan is quoted as saying.
"These drills will have no outcome for them," Dehghan said.
Tensions have been on edge around the Persian Gulf this year. In early January, the US guided-missile destroyer USS Mahan fired warning shots
at Iranian boats near the Strait of Hormuz, the narrow entrance to the Persian Gulf.
The five Iranian boats came "within 900 yards or so" of the Mahan, which was sailing with two other US ships, a Pentagon spokesman said at the time.
A US warship also fired warning shots at Iranian vessels in an incident last August.