Foreign Secretary William Hague says he is "extremely disappointed" by Iran's decision to carry out high-level uranium enrichment and branded it a "provocative act".
A United Nation's nuclear watchdog confirmed that the process is under way in a fortified underground bunker near the holy city of Qom.
The "clandestine nature" of the activity undermines Tehran's claims that its nuclear programme is entirely civilian, Mr Hague said.
He claims Iran can provide "no credible rationale" for producing such quantities of 20% enriched uranium, which can be turned into fissile warhead material, and called on it to stop production immediately.
Mr Hague said: "I am extremely disappointed by Iran's decision to start enrichment operations at its Qom facility.
"At a time when the international community is asking Iran to provide assurances of the peaceful nature of its programme, this is a provocative act which further undermines Iran's claims that its programme is entirely civilian in nature.
"Iran only acknowledged the facility at Qom after its existence became known. Its size, location and clandestine nature raise serious questions about its ultimate purpose.
"Iran can provide no credible rationale for producing so much 20% enriched uranium. Its claim to be enriching for the Tehran research reactor does not stand up to serious scrutiny.
"Iran already has sufficient enriched uranium to power the reactor for more than five years and has not even installed the equipment necessary to manufacture fuel elements.
"If Iran has nothing to hide, it should seek every opportunity to reassure the international community of its peaceful intentions. In the absence of this, international pressure on Iran will only increase further".