The Iranian embassy in London has also been closed and its diplomatic staff instructed to leave the UK within 48 hours.
William Hague told parliament: “If any country makes it impossible for us to operate on their soil they cannot expect to have a functioning embassy here.
“This does not amount to the severing of diplomatic relations in their entirety. It is action that reduces our relations with Iran to the lowest level consistent with the maintenance of diplomatic relations.”
This is the latest step in the ongoing wrestle between the Islamic Republic and Western nations over Iran’s nuclear programme, which the country insists will only be used to generate electricity and not for weaponry.
Last week Britain imposed sanctions on the Iranian central bank after the UN suggested Iran was near to attaining nuclear arms.
France has called for further sanctions on Iranian oil imports in a move which Britain has not yet backed but is now expected to support.
France, Germany and the Netherlands have also recalled their ambassadors in Iran.
EU foreign ministers plan to meet today to discuss further action.