Foreign Secretary William Hague has said he intends to re-open Britain's Embassy in the Iranian capital Tehran.
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 agreement on how to deal with Iran's nuclear programme has led to increased contacts in 2014.
The move also comes as Iraqi forces are engaged in heavy clashes with Sunni Islamist militants in the country and amid reports that Iran is providing military assistance to its historic rival.
'Volatile'In a written statement, Mr Hague said the UK embassy will 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, who will give further details to MPs at 11:30 BST, said he had sought assurances that British diplomatic staff would be safe and would be able to carry out their work "without hindrance".
'More constructive'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 William Hague spoke to Iran's foreign minister over the weekend.
He said the election of Hassan Rouhani as president last year, regarded as much more moderate than his predecessor, had been an important step towards improving relations between Iran and the West.
Events in Iraq had given this gradual process of detente a "mighty great shove", he added.
Former senior diplomat Sir William Patey said it was potentially a "very significant moment" for dealings between the two countries.
He told BBC Radio's 4 Today programme that there had been an improvement in diplomatic relations over recent months following Iran's agreement to scale back its nuclear programme earlier this year.
'Bigger enemy'The current turmoil in Iraq meant there also was a "short-term congruence of interests" that made the move more likely and which could also lead to what he described as "arm's-length" military co-ordination between Tehran, Baghdad and Washington.
"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 and paving the way for the possible re-opening of the embassy.
Former foreign secretary Jack Straw, who led a parliamentary delegation to Iran earlier this year, has said that Mr Rouhani wanted Iran "to come in from the cold".
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.
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