Britain is formally recognising the opposition National Transitional Council as the "sole governmental authority" in Libya, Foreign Secretary William Hague announced today.
Mr Hague said he is expelling from the UK all remaining Libyan diplomats working for the regime of Muammar Gaddafi.
He said the Libyan embassy in London's Knightsbridge is to be handed over to the NTC, which has been invited to appoint a diplomatic envoy.
Mr Hague said the move would allow Britain to give "greater practical assistance" to the opposition movement which is fighting to oust Gaddafi after 42 years in power.
Britain is unfreezing assets worth £91 million belonging to an oil company now controlled by the NTC, to help it provide for the material needs of civilians in liberated areas of the country.
Speaking at the Foreign Office in Whitehall, Mr Hague said that, from now on, Britain will deal with the NTC "on the same basis as other governments around the world".
He added: "The UK is committed to supporting the Libyan people. We are a strong and true friend...
"The Libyan people can be assured that we will remain on their side for as long as it takes."
Mr Hague said the Libya Contact Group meeting in Istanbul on July 15 had decided to deal with the NTC as the legitimate governing authority in Libya.
Setting out Britain's response to this decision, Mr Hague said: "The Prime Minister and I have decided that the United Kingdom recognises and will deal with the National Transitional Council as the sole governmental authority in Libya.
"This decision reflects the National Transitional Council's increasing legitimacy, competence and success in reaching out to Libyans across the country.
"Through its actions, the National Transitional Council has shown its commitment to a more open and democratic Libya, something that it is working to achieve in an inclusive political process."
The NTC's behaviour was in "stark contrast" to Gaddafi's attacks on his own people, which have "stripped him of all legitimacy", he said.
Mr Hague added: "The NTC is a focal point for people throughout Libya who want a better future for their country.
"Our decision also reflects the responsibilities that the NTC has taken on in the areas under its control. It means we will deal with the National Transitional Council on the same basis as other governments around the world."
Mr Hague said the Libyan charge d'affaires was summoned to the Foreign Office this morning and told that he and other regime diplomats must now leave the UK.
"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.
Mr Hague said today's announcement had been delayed until the UK authorities were sure that Libyans studying in Britain would not lose out on financial support they receive via the embassy.
He said Britain was exploring measures to unfreeze Libyan assets in the UK, under the terms of United Nations resolutions, in order to allow the NTC to use the funds.
At the request of the Libyan-based Arabian Gulf Oil Company, the UK is unfreezing £91 million of the company's assets in Britain.
"This company is operating under the control of the NTC and we are assured that its activities will not benefit any listed entity under the sanctions," said Mr Hague.
"We will issue licences for the use of its frozen funds to meet basic needs in Libya. This will help to ensure that the crucial provision of fuel is maintained."
Britain will work with international partners over coming weeks to unfreeze further Libyan assets in the UK, including stocks of currency and other assets of the Libyan central bank, said the Foreign Secretary.
This morning at the Libyan Embassy on Knightsbridge, staff were seen going in and out of the front door, and there were cars with diplomatic number plates parked outside.
People leaving the building refused to answer questions from the press.
A group of cameramen, photographers and journalists gathered at the address from around 10.30am.
Britain suspended the activities of its embassy in Tripoli in February and has since set up a diplomatic mission in opposition stronghold Benghazi, led by one of the Foreign Office's most senior diplomats, Sir John Jenkins.
Mr Hague said the Benghazi mission was now the UK's largest diplomatic posting in north Africa after Egyptian capital Cairo.
British teams in Benghazi have helped the NTC build command and control capacity as well as make plans for a post-Gaddafi Libya, he said. The UK is providing communications equipment, support for the media and police, humanitarian assistance and mine-clearing capacity.
Mr Hague said he was conscious that Libyan students in the UK whose expenses had been paid by the Libyan embassy would be concerned about today's announcement.
"I want to reassure them that we are working closely with the National Transitional Council and the relevant banks to do all we can to make sure they and their families will continue to receive the funds to which they are entitled," he said.
The expulsion of Libyan diplomats was another step towards a "better democratic future" for Libya, and the momentum had shifted against Gaddafi and his forces, he added.
"Reports suggest that morale among the regime's forces is low," he said.
"Economic sanctions are restricting Gaddafi's ability to wage war on his own people.
"I'm making this announcement today to reflect the facts on the ground and to increase support for those fighting and working for a better future in Libya.
"We will sustain our actions for as long as necessary and our recent decision to deploy an additional four Tornado aircraft is a concrete illustration of this.
"This is the united international message as well from the Contact Group and what I have announced today will allow us to give further assistance to the people of Libya and underline the message to the Gaddafi regime that their legitimacy has come to an end."
Asked whether he believed the British mission had been successful so far, Mr Hague said: "What we've done has been very successful in saving civilian life.
"That is what we have achieved militarily in implementing the UN Security Council resolutions.
"The loss of life in Benghazi would have been terrible, the loss of life in Misrata would have been much greater without the action that we have been taking."
He added: "Of course what we want to see is a successful conclusion to the whole matter.
"That involves a political settlement in the end, it involves the implementation of the kind of thing the TNC has called for - the creation of an interim government that can take Libya towards elections and a free and democratic future.
"The actions we are taking today increase their ability to do that in the future."
He reiterated that the UK had not taken these actions earlier because the Government wanted a "high level of confidence" that large numbers of Libyan students would continue to receive funding.
"We now do have a high level of confidence about that, so at earlier stages, while we have expelled some of the Libyan diplomats and downgraded the Libyan People's Bureau, we were not ready to actually to close it, but now we are," he said.
Mr Hague said the "best solution" to the Libyan conflict would be for Gaddafi to leave the country as well as leaving power.
He said the UK had never set a deadline for the mission but the Government was very clear it would continue for "as long as it takes".
"The military side of this is sustainable indefinitely," he said.
"And that is why I've said many times that time is not on Gaddafi's side. Time is on our side in pursuing this action, much as we, of course, would like to see a more peaceful and prosperous and freer future for the people of Libya commence as soon as possible."