Tony Blair has expressed "revulsion" at the Iranian president's assertion that he wanted Israel "wiped off the map".
Mr Blair said the sentiments were 'totally unacceptable'
Mr Blair told an EU summit at Hampton Court, near London, that he had "never come across" comments like those made by Mahmoud Ahmadinejad on Wednesday.
He added that Iran, suspected of having a nuclear weapons programme, could soon be considered a "real threat".
But Iran later accused the West of turning a blind eye to what it called Israel's "crimes".
EU leaders earlier issued a joint statement saying they condemned Mr Ahmadinejad's remarks.
BBC political editor Nick Robinson said Mr Blair's comments carried the "implicit threat of military action".
The Iranian charge d'affaires in London had already been summoned to the Foreign Office for the UK to lodge a protest.
Speaking after a one-day EU summit, Mr Blair said the Iranian leader's sentiments were "completely and totally unacceptable".
Mahmoud Ahmadinejad came to power earlier this year
He said: "Their attitude towards Israel, their attitude towards terrorism, their attitude on the nuclear weapons issue - it isn't acceptable."
Mr Blair said he had never heard of the president of a country saying they wanted to wipe out another country.
"If they continue down this path, then people are going to believe that they are a real threat to our world security and stability.
"They may believe... the eyes of the world will be elsewhere, but I felt a real sense of revulsion at those remarks."
Mr Blair added: "Can you imagine a state like that with an attitude like that having a nuclear weapon?"
The BBC's Nick Robinson said: "I haven't heard the prime minister speak in this way since the Iraq war.
"He knew what he was doing today. He intended to keep Iran guessing."
Earlier, the US said the Iranian president's comments highlighted concerns about nuclear plans, which Iran says are for peaceful purposes only.
Mr Ahmadinejad made his comments at a conference in the Iranian capital Tehran entitled The World without Zionism.
Referring to Iran's late revolutionary leader Ayatollah Ruhollah Khomeini, Mr Ahmadinejad said: "As the imam said, Israel must be wiped off the map."
The Iranian foreign ministry later said the country's embassies in the West would officially protest against Europe's attitude to "Zionist crimes".
Although the ministry's statement did not specifically mention Mr Ahmadinejad's speech, it said Iran blamed the complex situation in the Middle East on continued support for Israel.
Mr Ahmadinejad came to power earlier this year, replacing Mohammad Khatami, a reformist who attempted to improve Iran's relations with the West.
Liberal Democrat foreign affairs spokesman Sir Menzies Campbell said: "Military action remains quite 'inconceivable', as the foreign secretary said last December."
He added: "The prime minister's revulsion is justified, but there are diplomatic and political steps that can be taken against Iran if it persists in bellicose behaviour and language."