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The Iranian parliament has retaliated against western economic sanctions imposed on the Islamic republic by approving a bill to reduce Tehran's diplomatic ties with Britain.

Iranian MPs on Wednesday voted by an overwhelming majority to downgrade Iran's relations with London from an ambassadorial level to that of chargé d'affaires.

The move has come two days after the US and Britain targeted Iranian financial sectors with new punitive measures over the Islamic regime's disputed nuclear programme.

The chancellor, George Osborne, said on Monday Britain would sever all ties with Iranian banks, including the Central Bank of Iran (CBI), to limit the regime's access to international funding for its nuclear activities. The US said it would sanction Iran's oil and petrochemical industry as well as companies affiliated to the elite revolutionary guards or those involved in its nuclear programme.

Reacting, 228 members of the Iranian parliament issued a statement on Wednesday condemning Britain's move.

"Britain's government once again showed a depth of hatred and enmity towards the Islamic republic system worse than that of the devil and it took another step towards being an enemy…by announcing sanctions on the central bank," the statement said.