Prime Minister Gordon Brown has said the UK will make "no apologies" for expelling four Russian diplomats.
Mr Litvinenko died in a London hospital in November 2006
The decision follows Moscow's refusal to hand over the former KGB agent accused of murdering Alexander Litvinenko in London last year.
Mr Brown said that because "there is no forthcoming co-operation, then action has to be taken".
The Kremlin said the decision was "immoral" and warned of "serious consequences" for the UK.
Former KGB agent Mr Litvinenko died of exposure to radioactive polonium-210 in London in November 2006.
But Moscow has refused to extradite the main suspect, Andrei Lugovoi, who denies involvement.
On a visit to Berlin on Monday, Mr Brown said: "When a murder takes place, when a number of innocent civilians were put at risk as a result of that murder, and when an independent prosecuting authority makes it absolutely clear what is in the interests of justice, and there is no forthcoming co-operation, then action has to be taken."
The prime minister added that he wanted a "good relationship" with Russia.
The Foreign Office has not named the four Russian diplomats, but the BBC understands they are intelligence officers.
Mr Miliband told MPs Russia was an important ally and the situation was one Britain had "not sought and does not welcome".
But he said it was necessary to send a "clear and proportionate signal" to Russia.
Russia's Foreign Ministry chief spokesman Mikhail Kamynin said: "London's position is immoral.
"Such provocative actions masterminded by the British authorities will not be left without an answer and cannot but entail the most serious consequences for Russian-British relations".
Russian President Vladimitr Putin's spokesman Dmitri Peskov said Britain's attitude was "reminiscent of the old way of thinking".
He added: "We don't want to be provoked into a ping-pong game, although of course the Russian side will provide a necessary response."
Mr Litvinenko's widow Marina said she was "very grateful" for the British government's actions and "proud to be a UK citizen".
Alex Goldfarb, a friend of Mr Litvinenko, said the UK's stance was "welcome and wonderful news", and that it should "be just the beginning of the process, and in the end of it I hope we'll get justice for Alexander".
Under the European Convention on Extradition 1957, the Russians have the right to refuse the extradition of a citizen.
The UK has the right to request Mr Lugovoi be tried in Russia, but the UK's director of public prosecutions, Sir Ken Macdonald, has already turned down the offer.
Mr Miliband said both the UN and EU had reported concerns the law in Russia was applied selectively.
He told MPs that international agreements had been reached that would allow Mr Lugovoi to be extradited to the UK if he travelled abroad.
Mr Miliband added: "We shall review the extent of our co-operation with Russia on a range of issues."
KEY EVENTS IN CASE
1 November 2006: Alexander Litvinenko meets Andrei Lugovoi and another Russian at a London hotel
23 November 2006: Litvinenko dies in a London hospital
24 November 2006: A Litvinenko statement accuses Russian President Vladimir Putin of involvement in his death. Experts say Litvinenko was poisoned
6 December 2006: UK police say they are treating the death as murder
22 May 2007: Lugovoi should be charged with Litvinenko's murder, British prosecutors say
28 May 2007: UK makes formal request for Lugovoi's extradition from Russia
Shadow foreign secretary William Hague said the Conservatives supported the tone and substance of the government's response.
And for the Liberal Democrats, Michael Moore said the government had been forced to act.
However, Labour backbencher Andrew Mackinlay said: "I am deeply concerned about the mood in this House which seems to be anti-Russia."
The radioactive isotope used to poison Mr Litvinenko was found in a several places that Mr Lugovoi had visited in London.
But Mr Lugovoi has said he was made a scapegoat and the poisoning could not have happened without some involvement from the British intelligence services.
The UK's director of public prosecutions has recommended Mr Lugovoi be tried for murder by "deliberate poisoning".