Israel and the UK have backed away from a full-scale diplomatic confrontation, with Britain announcing it is rebranding its consulate general ⁠building in ⁠East Jerusalem ​as a UK mission, a move that will result in UK diplomats leaving Israel, with only seven to remain in the building.

The move was forced on the UK by the Israeli government as punishment for the decision by the foreign secretary, Ed Miliband, last month to ban trade with illegal settlements and introduce a tougher sanctions regime against those that aided the building of settlements. The UK is seeking to protect the two state solution as the best means of ending the Israeli-Palestine conflict.

Miliband has also backed away from a threat to expel a parallel number of Israeli diplomats from London, as was once planned, arguing it would be unwise to do so during the Israeli election campaign.

There has been a dispute within the UK government over whether taking tough measures against Israel at such a sensitive political moment could help the re-election chances of the prime minister, Benjamin Netanyahu, before polls on 27 October if they would appear to boost his standing as a leader prepared to confront the nation's critics.

Israel had ​ordered the ‌British consulate ‌in East Jerusalem to shut on Thursday, and the foreign minister, Gideon Sa'ar, said that it had acted on its threat, describing the consulate as closed.

The consulate is separate from the UK embassy, based in Tel Aviv, and has a distinct diplomatic role, covering East Jerusalem, the rest of the West Bank and Gaza, where it provides consular services to Palestinians. Miliband said in a statement: "The UK government reiterates its longstanding view that East Jerusalem is occupied territory."

Sa'ar listed four actions to curtail UK activity in Israel, including the removal of the British representatives from the International Gaza Support Center in Kiryat Gat and entry bans to Israel for 12 named individuals, including the former Labour leader Jeremy Corbyn. "We established a clear principle: It is not possible to act against Israel without Israel taking appropriate measures in response," he said. "We did not want to reach this point, but the actions of the UK Labour government brought us here."

He also accused the UK government of "hostile rhetoric, including false accusations against Israel, such as accusations of 'ethnic cleansing'".

Miliband, who is currently visiting Kyiv, said in a statement that having ‌withdrawn a number of staff and families in recent ​weeks partly for security reasons, it would be possible to work to build up the presence at the mission in future months.

He said Britain would ⁠not take any reciprocal action ​against Israel ​while the ​two sides engaged in ​talks.

UK sources said Sa'ar had threatened to close the whole consulate, and it was better for Britain to retain its reduced presence in the hope it could be restored and rebuilt regardless of the imminent election outcome.

The sources stressed that the right to take reciprocal action remained, and the UK did not accept that Israel had the legal right to close the consulate, which has stood for 200 years and is placed in East Jerusalem on territory that Britain and international courts recognise as occupied territory.

Miliband said the UK mission would be independent, operational and still able to deliver vital services to the Palestinian people. The value of that assertion will be tested by the small number of diplomats remaining and their reduced diplomatic status. The UK national security adviser, Jonathan Powell, travelled to Israel last week to negotiate a version of the deal.

Vincent Fean, the UK consul general to Palestine between 2010 and 2014, said: "The term mission is a generic diplomatic term and does not of itself have any meaning … In terms of numbers, losing 20 staff is a big drop but it's a better outcome than nothing. It leaves a space, a place and team to build up whatever the outcome of the Israeli election."

Diplomats from other western countries had been worried about any closure setting a precedent, and suggested Britain had to respond strongly to the Israeli move because it had implications beyond the immediate dispute.

The ‌incident has highlighted growing frustration among Israel's longtime allies over its settlements in the occupied West Bank, viewed by much of the world as illegal under international law. In his statement last month to the UK parliament, Miliband said settler terrorists, supported by Netanyahu's government, were committing ethnic cleansing in the West Bank. Israel disputes this.

The UK Foreign Office was advised informally by the former attorney general Dominic Grieve that Israel would be acting unlawfully if it closed the consulate on the basis it was sited in East Jerusalem, which is recognised by the United Nations and most of its members, including the UK, as being occupied Palestinian territory.

Israel has also said it will revoke the credentials of Dutch diplomats from the country's mission to Palestine in response to the Netherlands' ban on imports from illegal Israeli settlements. France and Canada, which joined the UK in the settlement trade ban, have not had action taken against them.

UK-Israeli relations have deteriorated steadily during the war in Gaza, prompted by Hamas's 7 October 2023 massacre of Israelis, as Britain became increasingly critical of the way in which Netanyahu seemed prepared to tolerate the deaths of thousands of Palestinians in an effort to render Hamas inoperative, a task successive Westminster governments thought was unachievable through his methods.

The UK has rescinded a large number of arms export licences to Israel and Miliband has spoken of evidence of war crimes in Gaza. He has declined to accuse Israel of genocide on the grounds he believes this is a matter for international courts to determine.