Israeli Foreign Minister Gideon Saar said 20 diplomats and the consul general would leave Israel, while a seven-member team could remain at the building with a much more limited scope of activities.
Saar said Israel had implemented measures announced in response to British sanctions imposed on Israeli settlements in the occupied West Bank.
British Foreign Secretary Ed Miliband said some officials had been temporarily withdrawn for security reasons. He stressed that the mission would continue working with the Palestinian people.
Israel had announced in September that it would close the consulate in response to British sanctions targeting Israeli settlements in the occupied West Bank, which are considered illegal under international law.
Saar said the consulate had stopped its activities and that its sign had been removed from the building. However, the British flag was still flying outside the building on Thursday morning, while several officials were seen entering the premises.
Saar acknowledged that the building is owned by the British government and said Israel had allowed a team of seven diplomats to continue operating there on a limited basis.
Established in 1838, the British Consulate in Jerusalem is separate from the British Embassy in Tel Aviv. The consulate handles Britain's relations with Palestinians in Jerusalem, the West Bank and Gaza.
The latest development comes amid tensions between Israel and the UK over British sanctions against Israeli settlements and London's position on the Palestinian territories.
