Iran has denied UK claims that it is responsible for explosions that have caused the deaths of all eight British soldiers killed in Iraq this year.
There have been violent anti-British protests in Basra
A senior British official linked the type of bombs used in the attacks to Iran's Revolutionary Guards.
He said they had provided technology to a Shia Muslim group in southern Iraq.
An Iranian foreign ministry spokesman denied the charge, saying it was a "lie" and accusing Britain of fomenting unrest in Iraq.
Speaking on Iranian TV, Hamid Reza-Asefi said: "This is a lie. The British are the cause of instability and crisis in Iraq.
"By drafting such scenarios they are trying to find a partner in their crimes."
He added: "From the very beginning, we have stated our position very clearly - a stable Iraq is in our interests and that is what the Iraqi authorities have said themselves on many occasions."
The British accusation is the first time British officials have made specific allegations over Iran's alleged role in Iraq.
It comes as relations between the UK and Iran are running at a low ebb after the apparent collapse of negotiations over Iran's nuclear programme.
The BBC's diplomatic correspondent Bridget Kendall says that although the dispute may sound like a tit-for-tat exchange, tensions in southern Iraq could rise and relations between Britain and Iran look set to deteriorate further.
Iran's military are accused of links to Shia militias in Iraq
Britain's approach echoes that of Saudi Arabia, which expressed concern recently that Iran was meddling in the Shia regions close to the Iran-Iraq border.
The UK official, who spoke on condition of anonymity, said the bomb technology used against British forces in Iraq had come from the Tehran-backed Hezbollah militia in Lebanon, via Iran.
He said that dissidents from the Mehdi army, a militia controlled by the radical Shia cleric Moqtada Sadr, were suspected of carrying out the attacks.
One of their leaders, Ahmed al-Fartusi, was arrested by British forces recently and was "currently enjoying British hospitality", as the official put it.
It was that arrest which sparked off an anti-British protest in Basra recently.
Saddam trial postponed?
The UK official added that protests had been made to Iran, which had denied responsibility.
Asked about an Iranian motive, he said that it could be that Iran felt that it had to show that it could not be "pushed around".
The official also said that the trial of Saddam Hussein, due to start on 19 October, might be postponed until after the elections in December.
Logistical arrangements for the trial, including a witness protection programme and even whether bulletproof glass was to be used around the dock, had still not been decided, he said.