Israel announced Thursday that the British Consulate in East Jerusalem has "ceased to function," forcing 20 staffers to leave the country and deepening the worst diplomatic rift between the allies in decades.

The sign outside the consulate was taken down, but Britain said the building remains open and a core staff will continue to deliver "vital services” and work with Palestinians.

The U.K. government said it would not retaliate by expelling Israeli diplomats as it seeks to rebuild its staff.

The dispute began last month when the United Kingdom banned trade with Israeli settlements in the occupied West Bank. The United Nations and much of the international community consider all settlements as illegal.

"Israel will no longer turn its cheek to diplomatic attacks against it," Israeli Foreign Minister Gideon Saar said in a statement, adding that the building would continue to operate with a "task force" of seven diplomats and a "very limited” scope of activity. Twenty British diplomats will leave Israel, including the consul general.

British Foreign Secretary Ed Miliband said in a statement that the building "will be known as the U.K. Mission, Jerusalem" after discussions with Israel’s government, and a small team of diplomats would continue to operate there.

"This will ensure that we maintain our longstanding British presence and the U.K.'s role in support of a two-state solution," Miliband added.

Britain had threatened to expel Israeli diplomats if the consulate was closed, but said it would not do so for now because it's in talks with Israel about expanding the mission.

"We will work in the coming months to build back up our presence," Miliband said.

Meanwhile, "our diplomats are going to be able to carry out their important work in relation to, for example, relations with the Palestinians, but also supporting British nationals visiting the area," Middle East Minister Stephen Doughty told Times Radio.

Miliband made clear that Britain does "not accept that the government of Israel has the legal right to close the British Consulate General in Jerusalem, which has been there for nearly 200 years."

The foreign secretary added that the U.K. government reiterates its view that East Jerusalem "is occupied territory."

The U.K. and Israel continue to have close defense and security cooperation, but diplomatic relations have deteriorated over Israel’s conduct of its genocidal war on Gaza and Britain’s decision last year to recognize a Palestinian state.

Last month’s announcement of the ban on trade with Israeli settlements in the occupied West Bank marked a significant toughening of Britain’s stance toward a longtime ally.

Doughty, the Middle East minister, said the U.K. has "a strong and ongoing relationship with Israel."

Israel captured and occupied the West Bank, along with Gaza and East Jerusalem, in the 1967 Mideast war, territories the Palestinians want for a future state.

Since then, the Israeli government has built scores of settlements that are home to well over 500,000 illegal Jewish settlers. Many settlements resemble fully developed suburbs.