21 November 2011 Last updated at 10:32 ET 
From 1500 GMT on Monday, all UK credit and financial institutions are required to cease all transactions with banks including the Central Bank of Iran.
Chancellor George Osborne said there was evidence that Iran's banks were funding its nuclear weapons programme.
This is the first time the UK has used powers created under the 2008 Counter-Terrorism Act to cut off a country's banking sector in this way.
Mr Osborne said: "We have ceased all contact between the UK's financial system and the Iranian financial system.
"We're doing this because of international evidence that Iran's banks are involved in the development of Iran's weaponised military nuclear weapon programme.
"We're doing this to improve the security not just of the whole world, but the national security of the United Kingdom."
Iran insists its nuclear programme is purely civilian and for scientific research, but Western nations fear it is trying to build a nuclear weapon.
A report from the IAEA earlier this month said the organisation had "serious concerns regarding possible military dimensions to Iran's nuclear programme".
It said Iran had "carried out activities relevant to the development of a nuclear explosive device".
UK severs ties with Iranian banks
The move was announced by UK Chancellor George Osborne
The UK has imposed new sanctions against Iran which will cut off all financial ties with Iranian banks.
It follows the International Atomic Energy Agency's report on Iran and concerns about its nuclear programme.From 1500 GMT on Monday, all UK credit and financial institutions are required to cease all transactions with banks including the Central Bank of Iran.
Chancellor George Osborne said there was evidence that Iran's banks were funding its nuclear weapons programme.
This is the first time the UK has used powers created under the 2008 Counter-Terrorism Act to cut off a country's banking sector in this way.
Mr Osborne said: "We have ceased all contact between the UK's financial system and the Iranian financial system.
"We're doing this because of international evidence that Iran's banks are involved in the development of Iran's weaponised military nuclear weapon programme.
"We're doing this to improve the security not just of the whole world, but the national security of the United Kingdom."
Iran insists its nuclear programme is purely civilian and for scientific research, but Western nations fear it is trying to build a nuclear weapon.
A report from the IAEA earlier this month said the organisation had "serious concerns regarding possible military dimensions to Iran's nuclear programme".
It said Iran had "carried out activities relevant to the development of a nuclear explosive device".
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