Britain has ordered the closure of the Iranian embassy in London and says staff must leave within 48 hours.
The measures were announced by British Foreign Secretary William Hague a day after protesters stormed British diplomatic compounds in Iran.
Mr Hague described those involved as members of a student militia controlled by elements of the Iranian regime.
He told the House of Commons that any idea that the events in Iran could have happened without some degree of regime consent was "fanciful".
All British embassy staff have now left Iran, the BBC reports.
Mr Hague says that move and the closure of the Iranian embassy in London do not represent the severing of diplomatic relations between Britain and Iran in their entirety.
However, he acknowledged that relations will now be reduced to the lowest level possible.
"We wish to make absolutely clear to Iran and to any other nation that such action against our embassies and such a flagrant breach of international responsibilities is totally unacceptable to the United Kingdom," he says.
Reuters news agency quotes the Iranian foreign ministry as saying the British move is "hasty" and that Iran would take "further appropriate action".
Iran expected to be discussed at Brussels meeting
The issue of Iran is expected to come up at a meeting of European foreign ministers in Brussels on Thursday.
The BBC says the meeting will be the first chance for the British Foreign Secretary to see if other EU nations will follow Britain and take measures against Iran.
France, Germany and the Netherlands have already recalled their ambassadors to Tehran for consultations and there are reports Britain may press for further economic sanctions against Iran's energy sector, including its oil industry.