A British-flagged oil tanker was seized by Iranian authorities in the Persian Gulf on Friday.
Jeremy Hunt, the foreign secretary, said the actions of Iran raise “very serious questions”.
He told reporters he will unveil diplomatic and economic measures on Monday in response to the apprehension and detention of the Stena Imperto.
France and Germany joined condemnation of Iran’s actions, which have triggered concerns that it will lead to further oil price hikes.
The incident is the latest episode of a tense stand-off between the Islamic Republic and Western nations, as tensions grow over the unravelling of a 2015 nuclear deal.
Here’s what happened and what it means...
How it unfolded
On Friday, Iran’s Revolutionary Guard said it has seized two oil tankers - one British-flagged and the other British owned, which was later let go.
Stena Imperto was commandeered in the Omani waters in the economically significant Strait of Hormuz by the Iranian Revolutionary Guard, according to the semi-official Fars news agency.
HMS Montrose, which is patrolling the Persian Gulf to protect shipping, and earlier this month intercepted Iranian patrol boats surrounding another UK-flagged tanker, reportedly arrived minutes too late to prevent the latest incident.
The second oil tanker, the Liberian-flagged Mesdar, which is managed by Norbulk Shipping UK, veered off course towards the Iranian coast after it was boarded by armed guards at about 5.30pm on Friday.
Communication with the ship was later re-established and the crew were unharmed. The tanker was reportedly allowed to resume navigation.
Audio footage has since emerged between Iranian authorities and HMS Montrose moments before the Stena Impero was seized.
In the radio recording, the Iranian vessel can be heard saying: “If you obey, you will be safe. Alter your course immediately. I want to inspect the ship for security reasons.”
HMS Montrose replied: “You must not impair, impede, obstruct or hamper the passage of the Stena Impero. Please confirm that you are not intending to violate international law by attempting to board.”
Last week, three Iranian vessels tried to block the passage of a British ship through the Strait of Hormuz but withdrew after warnings from a British warship, the government said on Thursday.
The 30mm guns on HMS Montrose were trained on the Iranian boats as they warned them off, according to US media. No shots were fired.
How has the British government reacted?
British ministers are said to be considering freezing assets of the Iranian regime in response to the diplomatic incident.
The foreign secretary told reporters that the House of Commons will be updated about further measures taken by the government in a statement on Monday.
Defence Minister Tobias Ellwood denied that the UK had taken its “eye off the ball” after the vessel as tensions in the Middle East escalate.
What prompted the incident?
The altercation came after British Royal Marines boarded an Iranian tanker, the Grace 1, off Gibraltar and seized it on suspicion that it was breaking EU sanctions by taking oil to Syria, on July 4.
The blocking of a British ship through the Strait of Hormuz could possibly have been retaliation.
The world’s most important oil artery links Middle East oil producers with markets in Asia, Europe, North America and beyond. It is just 21 miles (33 km) wide at its narrowest point but the shipping lane is just two miles (three km) wide in either direction.
By interrupting shipping, Iran is demonstrating it can disrupt the flow of oil and negatively impact international financial markets.
Why are there sanctions against Iran?
In 2015, a landmark international deal lifted previous sanctions against Iran in return for the curbing of the country’s nuclear programme.
The US withdrew from the pact last year and extended sanctions against Iran, effectively driving it from mainstream markets and forcing it to find unconventional ways to sell crude oil, it’s main revenue earner.
That has deprived Tehran of the economic benefits Iran was to accrue in return for curbing its nuclear program, and the Islamic Republic says it will only return to full compliance once sanctions are lifted and Washington rejoins the pact.
European parties to the nuclear deal with Iran on Tuesday said they have “deep concern” that Tehran has begun enriching uranium to a higher purity than allowed under the agreement and called for an urgent meeting of all involved in the accord.
What has Iran said?
A spokesman for Iran’s Guardian Council was quoted as saying “the rule of reciprocal action is well known in international law” and that Tehran made the right decision in the face of an “illegitimate economic war and seizure of oil tankers”.
The explanation, which contrasts with a suggestion on Friday night that the Stena Impero was “violating international maritime rules” and had collided with a fishing boat, came as the UK Government warned British ships to stay away from the Strait of Hormuz.
What are the risks of escalation?
Iran and the US, long-time foes, say publicly they want to avoid war but the risk of direct confrontation has been rising.
Last month, Iran shot down a US drone near the Strait of Hormuz.
Trump aborted a retaliatory military strike, saying it could have killed 150 people, and signalled he was open to talks with Tehran without preconditions.
The US hopes to enlist allies over the next two weeks or so in a military coalition to safeguard strategic waters off Iran and Yemen, Marine General Joseph Dunford, the chairman of the Joint Chiefs of Staff, said on Tuesday.
European parties to the nuclear accord - Britain, France and Germany - have sought to keep the deal alive but Iran has said it will take further steps away from the accord unless it is allow to resume normal oil sales.
Francois Lecointre, the French armed forces chief, described the friction between the United States and France as a “clash of wills”.
“I think it is under control now... I don’t think it can spiral out of control but there can be escalation,” he told CNews television.