Chancellor of the Exchequer George Osborne said Monday Britain was cutting links with Iranian banks because of "evidence" that they are involved in the development of a nuclear weaponsprogramme.
"The UK government has just announced new financial sanctions against Iran. We are ceasing all contact between the UK financial system and the Iranian banking system," Osborne said.
The Treasury said it was the first time Britain had cut an entire country's banking sector off from the British financial sector.
The move follows the latest reports from the UN nuclear watchdog which last week expressed "deep" concern over Iran's nuclear ambitions.
Osborne said in a statement: "We believe that the Iranian regime's actions pose a significant threat to the UK's national security and the international community.
"Today's announcement is a further step to preventing the Iranian regime from acquiring nuclear weapons."
Iran denies Western claims it is developing nuclear weapons.
The United States is set to announce similar measures later Monday.