Hadi Soleimanpour, 47, arrested in Britain in connection with the Buenos Aires bombing that killed 85 people, was denied bail by a London court for a second time on Friday.
Iran’s foreign minister called the move politically motivated.
"What has happened in the last few days concerning the arrest of Mr Soleimanpour...is very suspicious. It means the behaviour of the British court was political," he said.
"Despite the generous bail...the British court chose not to release him temporarily so we are suspicious about the behaviour of the British and we definitely have to respond in the appropriate way," Foreign Minister Kamal Kharrazi told reporters.
The Iranian government and the ex-ambassador's parents had offered a combined guarantee of 700,000 pounds ($1.1 million) that Soleimanpour would not flee Britain.
But the court said the charges are too serious to allow bail and dismissed charges of any political motivation.
"What has happened in the last few days concerning the arrest of Mr Soleimanpour...is very suspicious"
Iranian foreign minister
Soleimanpour's arrest in northern England last week has rekindled a diplomatic spat between Iran and Argentina and has inadvertently dragged Britain into the equation as well.
The Argentine government accuses Soleimanpour of involvement in the car-bomb attack on the AMIA Jewish centre in Buenos Aires in July 1994 and wants him extradited from Britain. Soleimanpour was Iran's ambassador to Argentina at the time.
Iran vehemently denies any involvement in the attack.
Some hardline newspapers, traditionally wary of Britain's intentions towards Iran, have called for retaliation, such as expelling the British ambassador. Reformists have also joined in criticism of Britain.
The Iranian government spokesman said on Tuesday that Iran hoped the row would not escalate into action such as expelling the British envoy or withdrawing the Iranian ambassador to Britain. He said Tehran was keeping all its options open.