Dozens of young Iranian men have entered buildings inside the British embassy as well as a diplomatic compound in Tehran, throwing rocks, petrol bombs and burning documents looted from the offices.
The semi-official Fars news agency said that earlier in the day, security forces were trying to eject the protesters, who were a minority from a larger group staging an anti-UK demonstration outside the embassy.
The agency referred to the protesters as students who were chanting "Death to America", "Death to England" and "Death to Israel" among other slogans.
Live TV pictures showed several of the people on top of the entry gate to the embassy, waving Islamic flags.
One protester was seen waving a framed picture of Britain's Queen Elizabeth II, apparently found inside the British offices.
Al Jazeera's Dorsa Jabbari, reporting from Tehran, said that the protesters, who were initially cleared out of the embassy, had entered the embassy grounds for a third time.
The men said that they would not leave until they received direct orders to do so from Iran's supreme leader, Ayatollah Sayyid Ali Hossein Khamenei, said Jabbari.
The British foreign ministry issued a statement saying it was "outraged" by the situation.
"It is utterly unacceptable and we condemn it," it said.
Our correspondent said that the police and various ministries had prior knowledge of the protest, which was organised by the student arm of the Basij armed group.
"Any such action of this could scale can never be independent in the Islamic Republic," said Jabbari.
"These gatherings are always approved by higher officials."
In an appearance on state television on Sunday, Sardar Mohamad Reza Naghdi, the commander of the Basij, said that the unit was "counting the moments" until it could put an end to the "Zionist agenda."
|Protesters remove the crest of the British embassy in Tehran [Reuters]
Jabbari said a number of protesters had been taken into custody.
The Fars news agency also reported that six British embassy workers were freed by Iranian security forces and turned over to UK government representatives.
It later removed the story from its website.
Al Jazeera's Andrew Simmons, reporting from London, said further talks will be held on the situation.
He also said that according the British government, all UK embassy staff in Tehran and their families are accounted for.
Simmons added that William Hague, the UK's foreign minister, had said that "he wouldn't describe a hostage situation, but that UK embassy staff were protected by Iranian police".
"He [Hague] was grateful for that but then held the government accountable once again for what had happened," Simmons said.
Iran's foreign ministry issued a statement saying it regretted the attack against the embassy, and that Tehran is committed to the safety of diplomats.
Hague rejected the statement, saying that the UK held Iran responsible for "its failure to take adequate measures to protect our embassy, as it is required to do".
The incident followed Britain's imposition of new sanctions on the Islamic state last week over its nuclear programme.
London banned all UK financial institutions from doing business with their Iranian counterparts, including the Iran's central bank, as part of a new wave of sanctions by Western countries.
Hague spoke of a "robust" response to Iran's move in reducing diplomatic ties with the UK when news of the protest outside the embassy in Tehran broke.
Iran's Guardian Council approved a bill on Monday to downgrade Iran's ties with the UK, one day after the Iranian parliament approved the measure, compelling the government to expel the British ambassador in retaliation for the sanctions.
In parliament in Tehran on Sunday, a politician had warned that Iranians angered by the sanctions could storm the
British embassy as they did to the US mission in 1979.
A statement, Jay Carney, the White House press secretary, said that the US condemned "in the strongest terms" the attack on the UK's embassy.
"Iran has a responsibility to protect the diplomatic missions present in its country and the personnel stationed at them," said the statement.