Al Jazeera has learned that the expelled diplomat is probably Mossad's London representative, the Israeli spy agency accused by the UAE of being behind the killing Mahmoud al-Mabhouh.
Miliband said Britain will continue to support Israel's bid for security and stability but that Israel's actions had been completely unacceptable.
A statement from the Israeli foreign ministry, issued on behalf of Avigdor Lieberman, the country's foreign minister, said: "We hold relations with Britain in very high regard.
"We are holding a number of different and sensitive talks about this issue and we regret the British decision.
"Minister Lieberman has not received any proof of Israeli involvement in this affair".
Alan Fisher, Al Jazeera's correspondent in London, said that British investigators had discovered that the passports were cloned when UK citizens passing through Israel had their documents taken during routine security checks.
"The British believe that the intelligence agencies knew about this and used the cloned passports," he said.
"They're not suggesting that the Mossad or the military intelligence directorate were directly involved with the assassination, what they're angry about is the cloning of the passports which they believe put British citizens at risk."
Other members of the hit squad travelled on fake Irish, French and Australian travel documents, Dubai police said.
Israel has neither confirmed nor denied a role in the killing of al-Mabhouh in a hotel room on January 20, but Dubai's police chief says he is almost certain Israeli agents were involved.
Arieh Eldad, a National Union party Knesset member, said news of the expulsion on Tuesday was "hypocritical" of Britain.
"It's an ugly hypocritical phenomenon to intervene in what they accept as Israel's war against terror, nobody nominated them as the judges in our war against terror," Eldad said.
"That's why Israel should retaliate by sending home the military attache of the British embassy in Israel."
Earlier Israel confirmed that Ron Prosor, its ambassador to Britain, was called to London's foreign office on Monday for talks.
He is said to have been briefed on the results of Britain's Serious Organised Crime Agency probe into the passport cloning, which Gordon Brown, the prime minister, had ordered in February.
Britain sent investigators to Israel this month to meet eight Israeli-British dual nationals whose identities were used by suspects in the killing.
Dubai authorities have identified at least 26 suspects from the alleged hit-squad that travelled to the UAE on fake identities and forged European and Australian passports.
At least 15 of the suspected killers share names with Israeli citizens, raising suspicions the Mossad was behind the hit.
Interpol has published a wanted list of 27 people in connection with the slaying.