Foreign Secretary William Hague has said plans to re-open the British Embassy in Tehran are an "important step forward" in relations with Iran.
Mr Hague said the "circumstances were right" following an improvement in bilateral relations in recent months.
Full diplomatic relations with Iran were suspended after attacks on the British embassy in Iran in 2011.
The election of a new Iranian president and a deal on Iran's nuclear programme has led to renewed contacts this year.
The move comes as Iraqi forces are engaged in heavy clashes with Sunni Islamist militants across the country and amid reports that Iran is providing military assistance to its historic rival.
The US is deploying up to 275 military personnel to protect staff at its huge embassy in Iraq.
Mr Hague said the UK embassy would re-open "as soon as practical arrangements are made" as a sign of "increasing confidence" in the state of relations between the two countries.
"There has never been any doubt in my mind that we should have an embassy in Tehran if the circumstances allowed," he said.
"Iran is an important country in a volatile region, and maintaining embassies around the world, even under difficult conditions, is a central pillar of the UK's global diplomatic approach."
The foreign secretary said he had sought assurances that British diplomatic staff would be safe and would be able to carry out their work "without hindrance".
Speaking in Parliament, Mr Hague rejected suggestions that the move amounted to a "softening" of the UK's approach towards Iran and stressed the UK wanted to see a change in its foreign policy.
Tehran must "cease support for sectarian groups across the Middle East and reach a successful conclusion to nuclear negotiations", he told MPs.
Analysis by Kasra Naji, BBC Persian
Efforts to establish normal relations between UK and Iran were stepped up last year soon after the election of President Hassan Rouhani. He had promised to mend Iran's relations with the outside world.
Iran's relations with many countries had taken a turn for the worse during the previous eight years of disastrous foreign policy adventures under President Mahmoud Ahmadinejad.
It was on his watch that angry Islamic hard-line supporters of the government attacked and ransacked British embassy buildings in Tehran in November 2011. Now the two countries are trying to put all that behind them. Both countries need each other, and it seems the need for co-operation on stopping the advance of Isis in Iraq has given the efforts to improve relations a new impetus.
Britain needs Iran to help establish a broad-based government in Iraq. But there are still unresolved problems. Iran says it will not apologise for the attack that broke all diplomatic norms, although it says it is willing to discuss paying for the damages to the buildings.
The safety of Iranian staff working for the British embassy is another issue that needs firm guarantees from the Iranian side. But for ordinary people, the reopening of the embassies cannot come soon enough.
Tens of thousands of Iranians, many of them students, live in Britain. They and their families need visas and consulate services that they are not getting at the moment.
The shared interest in confronting militants led by the Islamic State in Iraq and the Levant (ISIS) has accelerated contacts between the West and Iran.
BBC political editor Nick Robinson said Mr Hague spoke to his Iranian counterpart over the weekend and while there had been a gradual detente in relations in recent months, events in Iraq had given the process a "mighty great shove".
Former Labour foreign secretary Jack Straw welcomed the move, which he said would have come at some stage but had been "accelerated" by developments in Iraq.
"I hope it will lead to a new strategic approach to see Iran as much more of a partner than an adversary," he told the BBC News Channel.
Former senior diplomat Sir William Patey told Radio 4's Today programme that it was potentially a "very significant moment" for dealings between the two countries.
"Iran is often seen as the enemy and has seen us as the enemy," he said.
"Against a backdrop of an improving relationship with the prospect of a nuclear deal, there is a prospect of having a more constructive relationship with Iran because there is a bigger enemy - which is Isis."
However, he warned the "potential for falling out with Iran is always very high".
The storming of the British embassy in 2011, in retaliation for UK support for sanctions against Tehran, was one of series of incidents in the past decade that have ratcheted up tensions between the countries.
In 2007, 14 Royal Navy sailors were detained by the Iranian authorities after they were accused of violating Iranian territorial waters.
The appointment of a UK-based British charge d'affaires to Tehran last year was seen as a sign of a thaw in relations. However, the UK government still has concerns about Iran's role in Syria, where it is supporting the government of Bashar al-Assad in its fight against rebel groups and its backing for Hezbollah in Lebanon.
The US broke off diplomatic relations with Iran in 1980 after 52 of its embassy staff were held hostage in Tehran.