Iran will appoint a charge d'affaires to work with Britain in return, Hague told the House of Commons. It was hoped the move would lead to the re-opening of the embassies of the two sides, he said.
Hague said talks with his Iranian counterpart Mohammad Javad Zarif had resulted in "a decision for both our countries now to appoint a non-resident charge d'affaires tasked with implementing the building of relations, including interim steps on the way towards the eventual reopening of both our embassies".
"This includes discussion of numbers of and conditions for locally engaged staff in the embassy premises of each country and visits to inspect these premises."
Britain shut its embassy in Iran's capital Tehran in November 2011 after it was attacked by protesters. But since newly elected President Hassan Rouhani took power, relations between Iran and the UK have improved.
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Hague hinted that Britain and the US would be willing to ease sanctions against Iran if its leadership was prepared to review its controversial nuclear programme.
"In the absence of change to these policies, we will continue to maintain strong sanctions. A substantial change in British or western policies requires a substantive change in that programme.