Britain is to cut all financial ties with with banks in Iran hiwle canada and the United States have also announced further sanctions against Tehran.
All British credit and financial institutions are required to cease all transactions with banks including the Central Bank of Iran.
US Secretary of State Hillary Clinton spoke of a "significant ratcheting-up of pressure" on Iran, and that Iran's petrochemical, oil and gas industries and financial sector would be targeted.
Canada is to take similar measures to the US.
Russia has dismissed the new sanctions as unacceptable and say they would hurt the chances of renewing talks with Tehran over its nuclear programme.
The new sanctions follow the latest report by the International Atomic Energy Agency on Iran and concerns about its nuclear programme.
British chancellor George Osborne said there was evidence that Iran's banks were funding its nuclear weapons programme.
The BBC reports this is the first time that Britain has used powers created under the 2008 Counter-Terrorism Act to cut off a country's banking sector in this way.