Ministers are reportedly considering freezing assets of the Iranian regime after its forces seized a UK-flagged tanker.
Foreign Secretary Jeremy Hunt will unveil the diplomatic and economic measures on Monday in response to the apprehension and detention of the Stena Imperto, according to the Sunday Telegraph.
The paper said London may also seek the reimposing of UN and EU sanctions which were lifted against Iran in 2016 in connection to a deal on the country's nuclear programme.
Any sanctions will reportedly be sought with the cooperation of Britain's allies in the UN.
On Saturday, Mr Hunt said Iran's actions raise "very serious questions" about the security of British and international shipping in the Strait of Hormuz.
The Foreign Secretary, speaking after a meeting of the Government's emergency committee Cobra, said the vessel was seized in Omani waters in "clear contravention of international law".
He told reporters inside the Foreign and Commonwealth Office that, having spoken to his Iranian counterpart Mohammad Javad Zarif, Tehran saw the situation as a "tit for tat" following the detention of Grace 1 in Gibraltar.
"Nothing could be further from the truth," he said.
"Grace 1 was detained legally in Gibraltarian waters because it was carrying oil, against EU sanctions, to Syria, and that's why the Gibraltarian authorities acted totally with respect to due process and totally within the law.
"Stena Impero was seized in Omani waters in clear contravention of international law, it was then forced to sail into Iran.
"This is totally and utterly unacceptable. It raises very serious questions about the security of British shipping, and indeed international shipping, in the Strait of Hormuz."
Mr Hunt said MPs would be updated about what "further measures" the Government will take on Monday, adding that the threat level had been raised to three.
"Our priority continues to be to find a way to de-escalate the situation.
"That's why I reached out to the Iranian foreign minister, that's why due process in Gibraltar continues.
"We need to see due process happening in Iran as well, we need to see the illegal seizing of a British flagged vessel reversed, we need that ship released, and we continue to be very concerned about the safety and welfare of the 23 crew members."
The Foreign Office earlier summoned the Iranian charge d'affaires, Mohsen Omidzamani, following the incident.
Iran has directly linked the seizure of the vessel with Britain's role in detaining a tanker carrying Iranian oil earlier this month.
A spokesman for Iran's Guardian Council was quoted as saying "the rule of reciprocal action is well known in international law" and that Tehran made the right decision in the face of an "illegitimate economic war and seizure of oil tankers".
The explanation, which contrasts with a suggestion on Friday night that the Stena Impero was "violating international maritime rules" and had collided with a fishing boat, came as the UK Government warned British ships to stay away from the Strait of Hormuz.
HMS Montrose, which is patrolling the Persian Gulf to protect shipping, and earlier this month intercepted Iranian patrol boats surrounding another UK-flagged tanker, reportedly arrived minutes too late to prevent the latest incident.
A second oil tanker, the Liberian-flagged Mesdar, which is managed by Norbulk Shipping UK, veered off course towards the Iranian coast after it was boarded by armed guards at about 5.30pm on Friday.
Communication with the ship was later re-established and the crew were unharmed. The tanker was reportedly allowed to resume navigation.
On Friday evening, Mr Hunt said he had spoken to US Secretary of State Mike Pompeo about the situation, and President Donald Trump said the US would be "working with the UK".
The Foreign Secretary said the US had a "different approach" to dealing with Iran, and that the UK would continue to support the Iran nuclear deal.
France and Germany joined condemnation of Iran's actions, which have triggered concerns that it will lead to further oil price hikes amid heightened tensions in the Gulf involving Iran, the US and UK.