Israel has said the UK’s consulate in East Jerusalem has “ceased to function” in retaliation for the Government’s trade ban with illegal West Bank settlements.

However, the UK insisted the building would continue to operate and maintain its diplomatic status, under an agreement to downgrade its name and reduce staff numbers.

Foreign Secretary Ed Miliband denied the Israeli government had the legal right to shut down the consulate and said the newly-named UK Mission “will continue to deliver vital services and our work with the Palestinian people”.

He said a number of staff had been temporarily withdrawn “to ensure their safety”.

The UK will seek the return of all diplomatic staff, now reduced to seven, after the October 27 Israeli election, and is keeping the threat of strong reciprocal measures on the table if discussions with Israel do not prove fruitful, it is understood.

Israel last month threatened to shutter the consulate, which represents the UK in the Occupied Palestinian Territories, within 30 days of the UK’s announcement of sanctions which sparked a diplomatic row.

As the deadline expired on Thursday, Israeli foreign minister Gideon Sa’ar said the British consulate in Jerusalem was “ending its activities today”, with the sign identifying the consulate having been removed.

Mr Sa’ar wrote on X: “The British Consulate in Jerusalem ended its role today. The Consul General and 19 diplomats are ending their assignments and will leave Israel.”

He acknowledged that the building belonged to the British Government, saying Israel had authorised it “to operate a task force of only seven diplomats from the building, which ceased to function as a consulate today”, and that the remaining staff would have “a very limited scope of activity”.

He claimed that there had been “no genuine dialogue” with UK ministers in recent years despite the security and intelligence cooperation between the two nations.

“We did not want to reach this point, but the actions of the UK Labour Government brought us here,” Mr Sa’ar said.

Israeli media had reported that the UK had threatened to expel up to 27 Israeli diplomats from London if the closure went ahead.

But Mr Sa’ar said: “In accordance with the understandings we reached, no measures will be taken against Israel as a result of the implementation of the decisions.”

The Foreign Office insisted the UK Mission retained all existing privileges, documentation and its diplomatic status, and had merely been downgraded in name and numbers under a deal with the Israeli government.

In his statement, Mr Miliband said: “We have been clear that we do not accept that the Government of Israel has the legal right to close the British Consulate General in Jerusalem, which has been there for nearly 200 years.

“The UK Government reiterates its long-standing view that East Jerusalem is occupied territory.

“Following discussions with the government of Israel, our Consulate General building will not be closing, and will be known as the UK Mission, Jerusalem from today.

“The UK Mission, Jerusalem is independent, operational, and will continue to deliver vital services and our work with the Palestinian people.”

The Foreign Secretary said the UK Mission would maintain long-standing British presence and the UK’s role in support of a two-state solution.

He added: “Without an understanding, we would not have the necessary assurances for the security and protections of our staff and premises.

“Accordingly, the UK has temporarily withdrawn a number of staff and families to ensure their safety and security.

“We will work in the coming months to build back up our presence, and we will not take reciprocal action while such discussions are under way and credible.

“The UK stands steadfast by the measures we took on 8 September, in concert with the international community, in support of a two-state solution to deliver peace and security for the people of Israel and Palestine.”

The UK aims to resume talks with whatever iteration of the Israeli government that emerges after the country’s election later this month and to build its full presence in East Jerusalem back up as soon as possible.

Pressed on the confusion caused by Israel declaring the consulate closed and the UK saying its diplomatic presence remained, Foreign Office minister Stephen Doughty denied it amounted to a political fudge.

“Absolutely not,” he told BBC Radio 4’s Today programme, adding: “You can see what’s changed in terms of a name, but crucially, the presence remains.”

Mr Doughty said the building remained open under an “agreement” with Israel, but that there was “an ongoing discussion” between the two countries.

He added: “We deeply regret the steps that they set out a few weeks ago in response to our measures.”

Israel’s move came in retaliation for the UK’s announcement on September 8 of a ban on imports from illegal settlements in the West Bank and sanctions on individuals and firms providing services to settlers.

Mr Miliband, unveiling the sanctions, accused Israeli Prime Minister Benjamin Netanyahu’s government of turning a blind eye to the “ethnic cleansing” of Palestinians.

Both Israel and the US criticised the UK’s stance.

The consulate, which was first established in 1838, handles UK relations with Palestinians in the city as well as in the West Bank and Gaza.

It is a separate mission to the UK embassy in Tel Aviv, which is the country’s main diplomatic interface with Israel.