Parliament adopted a bill overnight, which now has to go to the Guardians Council for approval, demanding that Iran's ambassador to Britain also be withdrawn as diplomatic relations are reduced to the level of charges d'affaires.
The politicians also raised the possibility of punishing "other countries that behave in a manner similar to that of Britain".
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"This is only the beginning," parliamentary speaker Ali Larijani warned.
Economic and trade relations with Britain, already meagre, will be pared to the minimum under the text, which requires the measures be implemented within two weeks.
Britain has described the vote as regrettable and warned London will respond "robustly" if the threat is followed through.
"This unwarranted move will do nothing to help the regime address their growing isolation or international concerns about their nuclear program and human rights record," the spokesman added.
Britain, whose City of London is the world's biggest financial centre alongside New York, said on November 14 it was "ceasing all contact" between its financial system and that of Iran.
That measure, announced in coordination with similar sanctions by the United States and Canada, came a week after a report by the UN atomic energy watchdog strongly suggesting that Tehran was researching nuclear weapons.
