Britain took the dramatic step of cutting off almost all ties with Iranian banks yesterday amid growing alarm that the country is pursuing an undercover nuclear-weapons programme.
The move was taken in conjunction with the United States and Canada, and the Government said it hoped several European nations would soon follow suit. The issue is due to be discussed by EU foreign ministers in two weeks.
The attempt to isolate Iran financially and choke off funds that could be used to develop ballistic missiles follows warnings from the UN atomic agency over the country's nuclear ambitions. But it is not thought that the ban will target the oil trade.
George Osborne, the Chancellor, said: "We believe the Iranian regime's actions pose a significant threat to the UK's national security and the international community." He added that it represented "a further step to preventing the regime from acquiring nuclear weapons".
It was the first time Britain used counter-terror powers to sever links with an entire nation's banking sector.
Iran claims its programme of uranium enrichment is solely aimed at energy production and medical research, but two weeks ago the International Atomic Energy Agency concluded that it was testing high explosives and detonators and developing computer models of a warhead's core. The IAEA report led to intense diplomatic activity over how to combat the threat from Iran.
Barack Obama, the US President, has urged Russia and China to join the West in taking tough action to isolate Mahmoud Ahmadinejad's government. William Hague, the Foreign Secretary, has refused to rule out the use of military action as a last resort if Iran failed to fall into line.
Under the terms of the Treasury announcement, all British credit and financial institutions were instructed from 3pm yesterday to "cease business relationships and transactions with all Iranian banks, including the Central Bank of Iran, and their branches and subsidiaries". Exceptions include small-scale remittances to support students and funds for humanitarian projects.
The Treasury said Iranian banks played a "crucial role" in the nuclear programme and the move would prevent British banks being unknowingly used in "proliferation-related transactions".