The mob moved into the diplomatic compound two days after Iran's parliament approved a bill that reduces diplomatic relations with Britain following London's support of recently upgraded Western sanctions on Tehran over its disputed nuclear program.
The protesters broke through after clashing with anti-riot police and chanting for its takeover. "Death to England,'' some cried in the first significant assault of a foreign diplomatic area in Iran in years.
There was no immediate word on casualties or how many embassy employees were inside at the time of the assault, although it occurred after business hours had ended. More protesters poured into the compound as police tried to clear the site.
Smoke rose from some areas of the embassy grounds and the British flag was replaced with a banner in the name of 7th century Shiite saint, Imam Hussein.
The occupier called for the closure of the embassy calling it a "spy den" the same phrase used after militants stormed the US embassy in Tehran in 1979 and held 52 hostages for 444 days. Washington and Tehran have no diplomatic relations since then.
The rally outside the British Embassy - on a main street in Tehran downtown - included protesters carrying photographs of nuclear scientist Majid Shahriari, who was killed last year in an attack that Iran blamed on Israeli and British spy services.
Outside the embassy, students from some universities and seminaries burned British flags on fire as clashing with police.
State TV reported that another group of hard-line students gathered at the gate of British ambassador's residence in northern Tehran, at the same time.
Tensions with Britain date back to the 19th century when the Persian monarchy gave huge industrial concessions to London, which later included significant control over Iran's oil industry.
But they have become increasingly strained as the West accuses Iran of trying to develop nuclear weapons -- a charge Tehran denies.
Hostages taken
According to Reuters news agency, there are reports of six embassy staff being taken hostage. More reports are awaited.