The detention of a British diplomatic team in Libya was the result of a "serious misunderstanding", Foreign Secretary William Hague told MPs.
In a Commons statement following the capture of the eight-strong team, which included special forces troops, Mr Hague said he had authorised the deployment.
He said: "They were withdrawn yesterday after a serious misunderstanding about their role, leading to their temporary detention."
Mr Hague said opposition groups in eastern Libya formed an interim national council in Benghazi on Saturday and ministers and Foreign Office officials "are in contact with members of this council, who welcomed the idea of a British diplomatic mission to Libya".
Mr Hague said: "This engagement is vitally important to gain a better understanding of the political, military and humanitarian situation on the ground.
"Last week I authorised the despatch of a small British diplomatic team to eastern Libya, in uncertain circumstances which we judged required their protection, to build on these initial contacts and to assess the scope for closer diplomatic dialogue. I pay tribute to that team."
Mr Hague said the situation which led to their detention was "resolved" and they were able to meet council president Mustafa Abdel-Jalil, but "it was clearly better for this team to be withdrawn".
"We intend to send further diplomats to eastern Libya in due course."
But shadow foreign secretary Douglas Alexander said: "I believe I speak for many when I say that the news on Sunday that British diplomatic and military personnel were being held was seen as just the latest setback for the United Kingdom and raises further serious questions about ministers' grip and response to the unfolding events in Libya."
Mr Hague said troops loyal to Colonel Muammar Gaddafi's regime had been launching counter-attacks against opposition forces, with "credible reports of the use of helicopter gunships against civilians".
There were also unconfirmed reports that a helicopter and jet had been shot down.
In the capital Tripoli there were reports of hostage taking and "large military deployments" as Colonel Gaddafi attempted to bolster his grip on the city.
Mr Hague warned of a "day of reckoning" for those in the regime responsible for human rights abuses.
"We are ... working with other countries to isolate the regime and to ensure that anyone responsible for abuses or contemplating further crimes knows that there will be a day of reckoning," he said.
In total more than 600 British nationals have been evacuated from Libya as well as people from "many other countries", Mr Hague said.
Around 180 Britons were still in Libya, many of whom have said they currently intend to stay.
Turning to possible further action on top of sanctions already announced, Mr Hague said: "We are making contingency plans for all eventualities in Libya.
"Nato has been tasked to work on a range of options, including the possible establishment of a no-fly zone, the evacuation of civilians, international humanitarian assistance and support to the international arms embargo.
"There will be further Nato meetings this week.
"At the UN Security Council, we are working closely with partners on a contingency basis on elements of a resolution on a no-fly zone, making clear the need for regional support, a clear trigger for such a resolution and an appropriate legal basis."
Prime Minister David Cameron will use an emergency meeting of the European Council on Friday to call for the EU to "change radically its thinking about its neighbourhood".
"We must give every incentive to countries in the region to make decisions that bring freedom and prosperity.
"At the Council meeting the Prime Minister will call for Europe to set out a programme to bring down trade barriers, to set clearer conditions for the help it provides, and to marshal its resources to act as a magnet for positive change in the region."
To laughter from Labour backbenchers, Mr Alexander said: "The British public are entitled to wonder whether, if some new neighbours moved into the Foreign Secretary's street, he would introduce himself by ringing the doorbell or instead choose to climb over the fence in the middle of the night."
The botched mission was the latest in a series of setbacks for the Foreign Office, he said.
"Firstly we had the still unexplained decision by the Foreign Secretary, alone among European foreign ministers, to publicise reports that Gaddafi was already on his way to Venezuela," he said.
"Then the Foreign Office was late to secure charter flights and even to convene the Government's emergency committee Cobra, when hundreds of UK nationals were stranded and clearly in danger.
"Then last week, the option of a no-fly zone was first talked up and then talked down, with the US defence secretary warning against loose talk on the issue."
Mr Alexander added: "After the events of this weekend and following the flights fiasco, twice in as many weeks ministerial decisions have generated an embarrassment that could all too easily have become a tragedy."
He asked Mr Hague whether he discussed the "merits or demerits" of the proposed operation with the Prime Minister and officials.
He also asked for the Foreign Secretary's assessment of the impact of the weekend's events on the "credibility of British foreign policy with the Gaddafi regime in Tripoli and indeed with the opposition forces in Benghazi".
Specifically, Mr Alexander asked: "Can you confirm that the Benghazi courthouse, which is serving as the headquarters of the interim national council, is but two miles from where HMS Cumberland was berthed yesterday afternoon?
"Can you confirm that the Royal Marines in recent days have, on several occasions, assisted EU nationals from Benghazi to Royal Navy warships in the area?"
Mr Alexander said he supported the Government's aim of establishing a dialogue with Gaddafi's opponents and welcomed Mr Hague's statement that further efforts would be made to engage with such forces.
"But our welcome to that initiative is conditional, for it should be done in a considered, co-ordinated way with our European and Nato allies," he said.
Mr Hague said the "timing and details" of the mission had been "decided by the professionals".
But he took "full ministerial responsibility" for the operation and confirmed that the Prime Minister had been aware in advance.
"When our staff go into a potentially dangerous situation, then the level of protection is provided for them based on professional and military advice," he said.
"We do that in many places around the world and, of course, it was important to do that in this situation.
"I authorised such a mission to be made, to put a diplomatic team into eastern Libya, as I explained, with protection.
"Of course the timing and details of that are operational matters decided by the professionals but ministers must have confidence in their judgments, as I do, and must take full ministerial responsibility for all their actions and judgments and, of course, I do.
"Of course, the Prime Minister and colleagues were aware that we would attempt to put a diplomatic team into eastern Libya."
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