The UK is to expel an Israeli diplomat over 12 forged British passports used in the killing of Hamas leader Mahmoud al-Mabhouh in Dubai in January.
David Miliband said there were "compelling reasons" to believe Israel was responsible for the forgeries.
The foreign secretary said the misuse of British passports was "intolerable".
Israel's ambassador to London, Ron Prosor, said he was "disappointed", but Israel confirmed there would be no tit-for-tat diplomatic expulsion.
Mr Prosor said: "The relationship between Israel and the UK is of mutual importance, hence we are disappointed by the... decision."
The name of the diplomat has not been released.
Israel has previously said there is no proof it was behind the killing at a Dubai hotel.
The foreign secretary said officers from Britain's Serious Organised Crime Agency (Soca) had investigated the matter of the passports.
It had concluded the passports used were copied from genuine British passports when handed over for inspection to individuals linked to Israel, either in Israel or in other countries, he said.
"Given that this was a very sophisticated operation, in which high-quality forgeries were made, the government judges it is highly likely that the forgeries were made by a state intelligence service," he said.
"We have concluded that there are compelling reasons to believe Israel was responsible for the misuse of the British passports."
The incident "represents a profound disregard for the sovereignty of the United Kingdom" he said.
He said the fact that Israel was a friend added "insult to injury".
The BBC's Middle East editor Jeremy Bowen said the expulsion sent a "very clear message" of British disapproval.
"It is a very big step for a government like the British to expel one of the diplomats belonging to one of its important allies," he said.
It is believed 12 fake British passports were used in the plot to murder Mr Mabhouh - the founder of Hamas's military wing - in his hotel room in Dubai on 19 January.
The names and details on the UK passports used by eight of the 12 suspects belonged to British-Israeli citizens living in Israel - all of whom have denied involvement in Mr Mabhouh's murder.
Their passports had been copied and new photographs inserted.
Mr Miliband said there was no evidence to suggest that any of the 12 passport holders were anything other than "wholly innocent victims of identity theft".
He said he was amending the official travel advice to Israel to make British nationals aware of the risks of their passports being misused.
He said he had met Israeli foreign minister Avigdor Lieberman in Brussels on Monday and had made clear the UK's "determination to see that this affair should never be repeated".
He handed him a letter "seeking a formal assurance... that in the future the State of Israel would never be party to the misuse of British passports in such a way".
It is not the first time British passports have been misused by Israel. In 1987 the country was caught forging UK passports for an intelligence operation, and Israel promised it would not do it again.
On that occasion, eight British passports reckoned to be for Mossad agents were found in a bag in a West German telephone booth.
A spokesman for the Palestinian Hamas group said it welcomed the decision to expel the diplomat, but wanted international efforts to track down the killers stepped up.
Dubai police have used CCTV footage to identify 27 alleged members of the team that tracked and killed Mr Mabhouh.
Passports from France, Ireland, Germany and Australia were also forged in the operation, and they too are investigating Israel's role.
Dubai officials said they were "99% certain" that agents from Mossad were behind the killing.
Following his death, Mr Mabhouh's family said doctors who had examined him determined he had died after receiving a massive electric shock to the head. They also found evidence that he had been strangled.
Blood samples sent to a French laboratory confirmed he was killed by electric shock, after which the body was sent to Syria.
Alleged Australian passport Photo released by Dubai police
Ex-Mossad agent: Israel uses 'false flag' in most operations to avoid suspicion in Arab states.
SYDNEY - Israel's Mossad has regularly faked Australian passports for its spies, an ex-agent said on Thursday, as anger grew over the use of foreign travel documents for an alleged assassination.
Former Mossad case officer Victor Ostrovsky told ABC public radio that the spy agency had used Australian passports for previous operations before last month's assassination of a top Hamas commander in Dubai that has been blamed on Israel.
He said agents had little trouble passing themselves off as Australians as few people in the Middle East have much knowledge about the country.
"Consider the fact that Australians speak English and it's an easy cover to take, very few people know very much about Australia," he said.
"You can tell whatever stories you want. It doesn't take much of an accent to be an Australian or New Zealander, or an Englishman for that matter.
"And I know people had been under Australian cover not once (but) quite a few times. So why not use it (again)?"
Australia summoned the Israeli ambassador and warned that the countries' friendly ties were at risk after Dubai police named three Australian passport-holders in a list of new suspects in the murder of Mahmud al-Mabhuh.
Britain, Ireland, France and Germany expressed similar outrage after people holding documents from their countries were also linked to the January 20 killing in a luxury Dubai hotel.
Israel has previously dismissed claims from Ostrovsky, who is now an author and has detailed various accusations against the country in his books.
He said Mossad prefers to use "false flag" passports as Israeli papers frequently invoke suspicion in the Middle East.
"They need passports because you can't go around with an Israeli passport, not even a forged one, and get away or get involved with people from the Arab world," he said.
"So most of these (Mossad) operations are carried out on what's called false flag, which means you pretend to be of another country which is less belligerent to those countries that you're trying to recruit from."
Ostrovsky said Mossad had a "very, very expensive research department" dedicated to manufacturing the fake documents which simulates different types of paper and ink.
"If they create a passport at a top level for use of that nature... I don't think anybody will be able to find the difference," he said, adding there was no chance any of the people named as suspects were Mossad agents.
"Except for James Bond, who actually pronounces or announces his arrival at the scene by saying, 'I'm Bond, James Bond', most people who work in the intelligence field don't present themselves by their real name," he said.
The Australian newspaper said Ali Kazak, a former Palestinian representative to Australia, had warned in 2004 that a Mossad agent in Sydney had obtained 25 false Australian passports.
In March 2004, two suspected Mossad agents were arrested in New Zealand and later convicted for fraudulently trying to obtain passports from the country, prompting diplomatic sanctions.
Secrets du Mossad, par l'ex-agent du Mossad Victor Ostrovsky
Le directeur technique de Payoneer (lié à l'assassinat d'un chef du Hamas à Dubaï) camoufle le passé de son collègue dans un commando militaire israélien
Pressions grandissantes sur Israël pour qu'elle s'explique sur son rôle dans l'assassinat d'un chef du Hamas à Dubaï
Biden et Clinton avertissent Israël qu'il met les États-Unis et le monde entier en danger
Menaces sionistes visant le président et le vice-président américain
Not a Democracy? Israel 'Showed Its Real Face' in Dubai-Mossad Scandal
Mise à jour 2 mai 2010:
Un chef du Hamas abattu par l'armée israélienne