The UK has severed all financial ties with Iranian banks in an unprecedented move in response to mounting fears over the country's nuclear ambitions.
All British credit and financial institutions had to cease trading with Iran's banks from this afternoon, Chancellor George Osborne announced.
"We believe that the Iranian regime's actions pose a significant threat to the UK's national security and the international community," he said.
"Today's announcement is a further step to preventing the Iranian regime from acquiring nuclear weapons."
The move by the UK - the first use of the power to cut off an entire nation's banking sector - is part of a wider international effort involving the US and Canada.
Diplomatic tensions were significantly raised last week by the latest assessment by the United Nations' watchdog.
The International Atomic Energy Agency (IAEA) concluded that some alleged undercover nuclear activities could only relate to weapons production.
Tehran angrily denies its programme is designed to produced anything but civil nuclear fuel but it faces mounting international pressure.
Foreign Secretary William Hague refused earlier to rule out possible military action in future if the stand-off continues.
Under the terms of the crackdown, all UK credit and financial institutions are required "to cease business relationships and transactions with all Iranian banks, including the Central Bank ofIran, and their branches and subsidiaries".
The Treasury said banks played a "crucial role" in facilitating Iran's nuclear programme and denying access to London would strike a blow at Tehran's ambitions.
It would also prevent UK institutions being "unknowingly used by Iranian banks for proliferation-related transactions", a spokesman said.
Mr Osborne said: "I have today taken action to impose further financial restrictions against Iran. This follows the International Atomic Energy Agency's report uncovering evidence of Iran's development of nuclear weapons technology. It is also a response to calls from the Financial Action Task Force for countries to strengthen safeguards to protect their financial sectors from money laundering and financing of terrorism risks emanating from Iran."
Mr Hague said: "The IAEA's report last week provided further credible and detailed evidence about the possible military dimensions of the Iranian nuclear programme. Today we have responded resolutely by introducing a set of new sanctions that prohibit all business with Iranian banks.
"We have consistently made clear that until Iran engages meaningfully, it will find itself under increasing pressure from the international community.
"The swift and decisive action today co-ordinated with key international partners is a strong signal of determination to intensify this pressure."