Foreign Secretary David Miliband informed Israel’s Foreign Minister Avigdor Lieberman of his decision to remove an Israeli diplomat at a meeting on Monday in Brussels.

Mr Lieberman said he regretted Britain’s decision but said there was still no proof Mossad had been involved in the assassination of a Hamas terrorist, Mahmoud al-Mabhouh, in Dubai, where many of the hit squad used forged British passports.

Mr Miliband and Mr Lieberman also discussed the settlement issue in east Jerusalem and the West Bank — concluding with Mr Lieberman inviting his British counterpart to dinner at his home in the settlement of Nokdim, to see how peacefully Jewish settlers live alongside Palestinians.

Later, Mr Lieberman said: "We attribute great importance to our relations with Britain. We hold a number of different and sensitive dialogues with them, and regret the British decision. We have never been given proof that Israel was involved in this affair."

At a muted celebration of the opening of the refurbished Israeli embassy in London, which Mr Miliband had been scheduled to attend, Israeli ambassador Ron Prosor said: "Today has been a little more historical, and hysterical, than we would have chosen."

He joked with a junior Foreign Office official at the ceremony saying: "It takes a lot to rile me, but you are definitely doing your best."

But he added: "Like any worthwhile friendship, the friendship between Britain and Israel has had its ups and downs. Today, we are experiencing both in one day.

“The path of true friendship doesn't always run smooth. Today, we face new challenges, which must be overcome together."

Mr Miliband confirmed later that the diplomat had been requested to leave and not technically expelled from the UK. He said: "He has been asked to leave, which is not the same as being expelled. We asked — and the embassy agreed."

Australian Foreign Minister Stephen Smith confirmed he had received a copy of the British report by the Serious and Organized Crime Agency for use in Australia’s own investigation into four forged Australian passports allegedly used in Dubai.

He said: "Suffice to say we are treating this matter very seriously. Israel understands that and when I receive the [Australian] report, we'll make judgments which will be in Australia's national interest.”