A ban on imports of Iranian oil could feature among tougher sanctions being pushed for by the UK amid an intense diplomatic storm over Monday's attack on the British Embassy in Tehran.
Foreign Secretary William Hague will discuss punitive measures with European Union counterparts a day after ordering the closure of Iran's London embassy and the expulsion of its staff.
The move came in retaliation for what Mr Hague said was the regime-backed storming of the UK compound by protesters, in breach of the Vienna Convention. Its staff have been evacuated and the embassy closed.
Announcing the move to MPs on Wednesday, Mr Hague said Tehran should be "ashamed" of the violent protest which saw union flags hauled down, a vehicle torched and looted documents thrown from windows.
It was conducted by about 200 demonstrators from an organisation "controlled by elements of the Iranian regime", he told MPs, and had made it "impossible" for the UK to maintain a presence.
Germany, France and the Netherlands recalled their ambassadors for discussions over their own future relations and Italy indicated that it could follow suit.
The latest developments in Iran will be on the agenda when EU Foreign Ministers meet in Brussels on Thursday.
The Iranian Foreign Minister has apologised for the incident.
But Mr Hague insisted: "No difficulty in relations can ever excuse in any way or under any circumstances the failure to protect diplomatic staff and diplomatic premises."
He made clear that while relations had not been severed entirely, they had been reduced to "the lowest level consistent with the maintenance of diplomatic relations".