Former British Foreign Secretary Jack Straw pours water into glass held by Iran's Deputy Foreign Minister Mehdi Danesh Yazdi at the residency of Iran's charge d'affaires in London.
Tehran - Move marks big thaw in West relations with Tehran.
Britain reopened its embassy in Tehran on Sunday, a striking signal of how Western ties with Iran have thawed since protesters stormed the compound nearly four years ago.
Foreign Secretary Philip Hammond watched the British flag being raised in the garden of the opulent 19th century building while the national anthem played. In 2011, the attackers burned the Union Jack and ransacked the ambassador's residence.
"Today's ceremony marks the end of one phase in the relationship between our two countries and the start of a new one - one that I believe offers the promise of better," he said.
The storming was a low point in diplomacy between the two countries, he said, but the relationship had improved "step by step" since the election of Iranian President Hassan Rohani in 2013.
Hammond said the nuclear agreement that the Islamic Republic struck with six major world powers last month was also an important milestone.
The agreement prompted a flurry of European visits - including from German and French ministers - aimed at positioning for the end of Iran's long economic isolation.
Britain had been held back by security concerns after the storming of its two main diplomatic compounds in Tehran on November 29, 2011.
The protesters slashed portraits of British monarchs, torched a car and stole electronic equipment.
Graffiti reading "Death to England" still adorns the doors to a grand reception room in a reminder of the storming.
Prime Minister David Cameron called the attack a 'disgrace', closed Britain's embassy and expelled Iran's diplomats from London. Within hours of Sunday's Tehran ceremony, which was guarded by dozens of Iranian police, Iran re-opened its embassy in London; both will be run by charge d'affaires at first but ambassadors will be agreed within months, the British foreign secretary said.
He is only the second British foreign minister to visit Iran since the 1979 revolution that toppled the US-backed Shah. The last visit was by Jack Straw in 2003. Accompanying Hammond was a small group of business leaders, including representatives from Royal Dutch Shell, Energy and mining services company Amec Foster Wheeler and Scottish industrial engineering firm Weir Group.
After more than a decade of casting the Islamic Republic as a rogue power seeking to sow turmoil through the Middle East, Britain has sought to improve ties with Iran, whose proven natural gas reserves are as vast as Russia's.
"In the first instance, we will want to ensure that the nuclear agreement is a success, including by encouraging trade and investment once sanctions are lifted," Hammond said.
Under the nuclear deal, sanctions imposed by the United States, European Union and United Nations will be lifted in exchange for Iran agreeing long-term curbs on a nuclear programme the West suspected was intended to make a nuclear bomb.
Tehran has always denied seeking nuclear arms.
Hammond told Iran's central bank governor, Valiollah Seif, that British banks, mindful of penalties imposed in the past by US authorities, wanted to ensure that they were fully compliant when they return to Iran.
"There is a huge appetite both on the part of our commercial and industrial businesses to engage with the opportunity of Iran opening up and there is huge appetite on the part of our financial institutions to support that activity but of course it has to be done in the proper way," he said.
Deep mistrust remains on both sides. Britain has been cast for decades by opponents inside Iran as a perfidious "Old Fox" or "Little Satan" who does the bidding of "Big Satan," the United States.
An electronic newsletter of the Fars news agency cast the reported re-opening of the embassy as the "Return of the Fox".
Following the 2011 storming, which was a protest against nuclear-related sanctions imposed by London, Iranian supreme leader Ayatollah Ali Khamenei called it an "evil embassy".
Protesters in 2011 smashed the large stone lion and unicorn on the gates at the ambassadorial residence, where in 1943 a dinner was held for Winston Churchill, Joseph Stalin and Franklin D. Roosevelt during the first meeting between the leaders of Britain, Russia and the United States to discuss their strategy for winning World War Two. - Reuters
Protesters also looted the embassy and smashed some treasures. A portrait of Queen Victoria was torn in two, the head was cut out of a portrait of Edward VII and a picture of Queen Elizabeth was stolen.
There has been no US embassy in Tehran since it was sacked in the early days of the Islamic Revolution in 1979 by students who feared a repeat of a 1953 coup when the CIA orchestrated the overthrow of Prime Minister Mohammad Mossadegh.
The US hostage crisis lasted 444 days and Washington and Tehran have never resumed diplomatic relations, leaving Britain first in line for the anti-Western feelings of the hardliners who run the Islamic Republic and their supporters.