Prime Minister Gordon Brown criticised Iran for expelling two UK diplomats from Tehran for alleged spying, and announced that two Iranian diplomats were being sent home in retaliation.
The tit-for-tat moves come as Iran has tried to blame the West - and Britain in particular - for the week of unrest which has rocked the Islamic state following its disputed presidential election.
Iran has long been deeply suspicious of Britain and its past history of imperialist meddling. In recent days, it has accused London of fomenting public anger and of sending spies to manipulate the election.
At Friday prayers last week, Iran's supreme leader Ayatollah Ali Khamenei accused Western countries of interference, and denounced Britain as "the most evil among them."
Iranians have accused the two British diplomats of "engaging in activities incompatible with diplomatic duties" - a euphemism sometimes used for spying.
Brown said the allegations were baseless and said "the onus is on Iran to show the Iranian people that recent elections have been credible".
"I am disappointed that Iran has placed us in this position, but we will continue to seek good relations with Iran and to call for the regime to respect the human rights and democratic freedoms of the Iranian people," Brown said.
Britain's Foreign Office believes the Iranian regime "is seeking to divert attention to the U.K. and away from what is an Iranian problem," a spokesman for the ministry said, speaking on condition of anonymity in line with policy.
To many British diplomats, the move to blame Britain has a familiar ring.
"When things go wrong, the natural Iranian regime response is to look for a foreign hand, whether there's any evidence of one or not," said Richard Dalton, Britain's ambassador in Tehran between 2002 and 2006.
Dalton was frequently rebuked by Iran's leaders over perceived British meddling. "Iranians have long memories, and they have a strong belief in conspiracy," he said.
"Modern-day Iranians are incredibly conscious of their history, in a way that British people perhaps are not," said Robert Gleave, director of the Institute of Arab and Islamic Studies at Exeter University. "It's a history of how Iran has been treated as a pawn in a great game. It's not so difficult to move from that, to a rhetoric of conflict and conspiracy," he said.
Others suspect Britain has come under recent attack because Tehran is wary of spoiling the prospect of better ties with US President Barack Obama's administration. Obama has held out the possibility of better relations.
"It seems that the Obama administration has kept a very hands off approach, which means the Iranian regime has not been able to accuse the "Great Satan" of meddling, so they have focused instead on Britain," said Adam Hug, policy director at the London-based think tank the Foreign Policy Centre.
AP