William Hague has said the UK will recognise the Libyan rebel council as the "sole governmental authority", as Gaddafi-regime diplomats are expelled.
The Libyan charge d'affaires was called to the Foreign Office earlier to be told he and other diplomats must leave.
Instead the UK will ask the National Transitional Council to appoint a new diplomatic envoy.
It follows similar moves by the US and France. The UK previously said it recognised "countries not governments".
A Foreign Office spokesman said that had not changed and said it was a political, not legal, recognition.
The green flag of the Gaddafi regime was still flying outside the embassy in Knightsbridge on Wednesday afternoon and attempts to reach staff for comment were not successful. Protesters carrying the red, green and black flag of the Libyan rebels gathered outside.
Libyan rebels and pro-Gaddafi forces are still locked in battle, five months after an uprising began against Muammar Gaddafi's 42-year rule, as Nato continues to enforce a UN-backed no-fly zone over the country.
'Sole authority'
At a press conference, Mr Hague said the NTC had shown its commitment to a "more open and democratic Libya... in stark contrast to Gaddafi whose brutality against the Libyan people has stripped him of all legitimacy".
He said a recent meeting of the Libya contact group in Istanbul had decided to treat the NTC as the legitimate government authority in Libya - and he was outlining the UK's response to that.
The UK would now deal with the NTC "on the same basis as other governments around the world" - and as a result the Libyan charge d'affaires had been summoned to the Foreign Office to be told all Gaddafi regime diplomats must now leave. It is thought that eight Libyan diplomats remain at the embassy.
"We no longer recognise them as the representatives of the Libyan government and we are inviting the National Transitional Council to appoint a new Libyan diplomatic envoy to take over the Libyan embassy in London," he said.
The change meant the UK could give "greater practical assistance than we've been able to give so far", he added.
The Foreign Office said the charge d'affaires, Khaled Benshaban, would be given three days to leave - while others would be decided on a "case-by-case basis".
Mr Hague said he was working with the NTC and Libyan banks and would do "all we can" to ensure Libyan students in the UK continue to receive the funds currently paid for by the Libyan embassy.
http://www.bbc.co.uk/news/uk-politics-14306544
Note: 27 July 2011 Last updated at 11:30 GMT