The Government has accused Iran of a "long line of slurs" amid claims four people with links to Britain had been arrested.
Iran claimed it had arrested four people suspected to be members of a British-linked terror cell blamed for at least five killings since 2008.
But a Foreign and Commonwealth Office spokeswoman dismissed the report as "baseless".
She said: "The UK does not support or encourage terrorist activity in Iran, or anywhere else in the world, and this claim will be seen as what it is: another in a long line of slurs against the United Kingdom from the government of Iran."
Iran's intelligence ministry claimed the four men were part of an Iranian Kurdish rebel faction known as Komala, the Associated Press reported.
The group has been accused of launching sporadic attacks for decades in a campaign for Kurdish autonomy.
The arrested men, said to be based in northern Iraq, reportedly received orders from a Komala commander who lives in Britain.