British Foreign Secretary William Hague said on Tuesday that Britain and Iran had embarked on a process that could lead to the reopening of their embassies after diplomatic relations broke down in 2011.
"Both our countries will now appoint a non-resident charge d'affaires tasked with implementing the building of relations, including interim steps on the way towards (the) eventual reopening of both our embassies," Hague told parliament.
Addressing Iran's disputed nuclear program, Hague said Tehran would need to make "substantive changes" to it if it wanted the West to ease sanctions, saying the future of British-Iranian relations would depend on tangible steps.
"Iran remains in defiance of six UN Security Council resolutions ... and it is installing more centrifuges in its nuclear facilities," said Hague.
"In the absence of substantial change to these policies, we will continue to maintain strong sanctions. A substantial change in British or Western policies requires a substantive change in that program."
Prime Minister David Cameron welcomed the election of President Hassan Rouhani earlier this year, but said ties remain strained because of the ransacking of the British Embassy in Tehran in 2011, an incident that led to one of the worst crises between the two countries since the 1979 Islamic Revolution.
Britain closed its embassy in December 2011 after hardline Iranian youths stormed the building in Tehran. The British also expelled all Iranian diplomats from London at the time.
The storming of the embassy followed accusations from Washington of an Iranian plot to assassinate the Saudi ambassador and a report from the UN nuclear watchdog suggesting Iran was pursuing nuclear weapons.