The UK is missing an opportunity by not sending an official to Iran for its new president's inauguration, says Labour's shadow foreign minister John Spellar.
He told the BBC that "engaging" with Tehran did not have to "imply approval" of the Iranian regime.
UK diplomatic staff were withdrawn from Iran and the embassy closed in 2011, after it was attacked by protesters.
The Foreign Office said it was "open to improvements" in its relationship with Iran on a "step-by-step" basis.
The inauguration ceremony for Iran's new president-elect Hassan Rouhani is due to be held on 4 August and Tehran is inviting visitors from other countries - although not the US or Israel - to attend.
But an agreement among EU members means only those with an embassy in Tehran will send representatives to the ceremony.
A spokesman for the Foreign Office said: "As the UK does not have an embassy or an ambassador in Tehran we are not attending. Diplomatic relations with Iran were reduced to the lowest level possible after the unprovoked attack on our embassy in 2011."
That decision has been criticised by Labour.
Mr Spellar told BBC Radio 4's Today programme: "Diplomacy is about recognising facts, even if you disagree with people. There's a huge range of issues, it's not just the nuclear issue that obviously there's been great focus on, but for example with the drawdown in Afghanistan."
He said neighbouring countries like Iran would be "crucial players in ensuring stability and progress" in Afghanistan.
"They can either be a constructive or non-constructive part of that, it's hugely important to engage, and I think it's a missed opportunity to start to establish links, to start to see where there may be common ground and to start to make progress towards more normal relations.
"It's not about celebration, it's not about showing approval... it's about doing business, it's about properly engaging."
The Conservative chairman of the Commons foreign affairs committee Richard Ottaway said there would be opportunities to re-engage with Iran, but the inauguration ceremony was not the right one.
"Before we engage with a country like Iran, which has broken off diplomatic relations, it has sacked our embassy, [and which] we are currently engaged in imposing economic sanctions on, we don't just, as a flip gesture, wade in and say: 'Let's talk'. You've got to carefully prepare before any negotiations."
The Foreign Office spokesman said: "President-elect Rouhani has made some positive statements about improving relations with the international community, including the UK.
"We are open to improvements in the bilateral relationship and are ready to increase contacts with Iranian officials on a step-by-step basis. We hope that Iran will take a different course for the future. We will judge Iran by its actions, as well as its words."
The US and the EU have long suspected that Tehran is trying to develop a nuclear weapon, in contravention of the Nuclear Non-Proliferation Treaty (NPT) and have imposed sanctions on the country.
But Iran has always denied any military motivation for the programme, insisting it is for civilian purposes only and within the terms of the NPT.
In June, US President Barack Obama said the US had "cautious optimism" it would be able to work with the newly-elected president.