Foreign Secretary Jeremy Hunt has agreed Britain will accord "diplomatic protection" to Nazanin Zaghari-Ratcliffe, the British-Iranian charity worker held in Iran since April 2016.
Iran has accused the mother of spying and sentenced to five years in prison over the allegations, which she denies.
Mr Hunt said he had decided to invoke the rarely used diplomatic device in recognition of Iran’s failure to meet its obligations under international law in its treatment of the 41-year-old dual national.
While he acknowledged the move was unlikely to be a "magic wand" that secures her immediate release, he said it elevated the dispute over her detention to a formal state-to-state issue.
The announcement was welcomed by her husband, Richard Ratcliffe, who has been lobbying ministers to take the step for some time.
"It is a very clear statement and so hopefully the Iranian authorities will realise this has gone on too long. They cannot play games like this with ordinary people’s lives," he said.
In reaching his decision, Mr Hunt said he had taken into account Mrs Zaghari-Ratcliffe’s "unacceptable treatment," by Iran since she was detained in 2016, including the denial of medical treatment and the lack of due process in the proceedings against her.
The Foreign Secretary said Tehran’s actions had been "totally wrong" and that no state was entitled to use innocent individuals as "pawns for diplomatic leverage."
"This represents formal recognition by the British Government that her treatment fails to meet Iran’s obligations under international law and elevates it to a formal state-to-state issue," he said in a statement.
"My decision is an important diplomatic step which signals to Tehran that its behaviour is totally wrong.
"It is unlikely to be a magic wand that leads to an overnight result. But it demonstrates to the whole world that Nazanin is innocent and the UK will not stand by when one of its citizens is treated so unjustly.
"I know there are many in Iran who understand the unjustness of this situation. No government should use innocent individuals as pawns for diplomatic leverage so I call on Iran to release this innocent woman so she can be reunited with her family."
Diplomatic protection is a mechanism in international law through which a state may seek reparation for injury to one of its nationals from an “internationally wrongful act” by another state.
Effectively it represents the right of states to raise the treatment of their nationals by other states and to call on them to account for their actions on the international stage.
It is distinct from diplomatic immunity which covers the status of accredited diplomats.
While it does not automatically dictate any particular course of action, the Foreign Office has indicated it will take the steps it believes are most likely to secure the goal of Mrs Zaghari-Ratcliffe’s release.