Iran has arrested eight local British embassy staff, triggering London's fury on Sunday and further exacerbating tensions with the West over the post-election turmoil in the Islamic republic.
The latest backlash against what Iranian leaders have branded as foreign "meddling" came as opposition leaders continued to defy the regime, rejecting a panel set up to hold a partial recount in the hotly-disputed presidential vote.
More than 2,000 people are still in detention and hundreds more are missing across Iran since a government crackdown on protests, the Paris-based International Federation for Human Rights (FIDH) said on Sunday.
On Sunday, police dispersed about 3,000 supporters of opposition leader Mir Hussein Mousavi who defied a ban on public gatherings in Tehran, witnesses said.
The witness also spoke of a "minor confrontation" between police and the demonstrators who had gathered around Ghoba mosque to mark the anniversary of a prominent cleric killed in a bombing 28 years ago.
Iran has repeatedly accused Britain and the United States of stoking the unrest that swept the country after the June 12 election that returned hardliner Mahmoud Ahmadinejad to power amid complaints it was rigged.
The Fars news agency said the eight staff members were arrested for having a "considerable role" in the riots.
Iran's intelligence minister Gholam Hossein Mohseni Ejeie confirmed the arrests and accused the British embassy of sending local staff "undercover among rioters in order to push its own agenda", IRNA news agency reported.
"Some of these individuals ... have been summoned. Some have been released after preliminary investigations and some have been kept in custody," he said.
British Foreign Secretary David Miliband said London protested strongly to Tehran over the arrests, adding that their release was Britain's "top priority" and dismissing claims the embassy was behind the demonstrations.
EU nations vowed on Sunday to respond to any harassment of diplomats in Iran with a "strong and collective response", Miliband told reporters at an EU foreign ministers' meeting in Corfu.
"There was ... a unanimous view that the European Union would act with solidarity and common commitment in the face of harassment and intimidation," he said.
Iran's Foreign Ministry Manouchehr Mottaki, on state television's website, urged Britain and the EU not to take rash action.
"Do not continue with this losing game because this is neither in the interests of the British people nor the two countries' relations that have (already) been damaged because of the British government's behaviour," he said.
He also called for European countries and officials to "revise their stand" towards Iran.
Iran's supreme leader Ayatollah Ali Khamenei added fuel to the fire, accusing European and American officials of making "idiotic comments" about Iran, state television reported.
The intelligence minister charged that "the British embassy played an important role in the recent riots both through media and its local sources (people)", IRNA reported.
"One of the things that this embassy did was to send out its local staff undercover among the rioters in order to push its own agenda," Mohseni Ejeie said, adding that "they used some rioters to collect reports". British newspapers called Monday for a measured response to the row.
"Let our cool heads embarrass their synthetic display of hysteria," said the Independent in an editorial, calling for Britain to coordinate any response with the European Union.
"If they then choose to accelerate this dispute even further, it will be clearer to most Iranians, and to the world, which side is angling for a fight - and why."
Iranian opposition leaders meanwhile continued on Sunday to challenge the regime, rejecting a panel set up by election supervisory body, the Guardians Council, to hold a partial recount.
Both Mousavi - Ahmadinejad's strongest rival - and another defeated candidate, Mehdi Karroubi, are demanding a new vote because of what they say are widespread irregularities.
The Guardians Council, an unelected body of 12 jurists and clerics, said a committee of political figures and candidate representatives would be set up to recount 10 percent of the ballots and draw up a report on the vote.
But in a letter to the council, the reformist former parliament speaker Karroubi said that a partial recount was "not enough" and called for an independent body to probe "all aspects of the election".
Mousavi rejected the Guardian Council's panel outright, while the other defeated candidate, Mohsen Rezai, has agreed to be part of the committee if Mousavi and Karroubi also agree to nominate representatives to the body.
But Mousavi, who has spearheaded the massive public opposition to the vote, has demanded a rerun, refusing to be cowed by a persistent crackdown against his supporters.
Mousavi, who was prime minister in the post-revolution years, won 34 percent of the vote against 63 percent for Ahmadinejad, a gap of 11 million votes, according to official results.
Since the election at least 17 people have been killed in clashes with security forces, according to state media. Foreign media are banned from the streets under new restrictions imposed in the wake of the election.