Most diplomats will leave the British consulate in occupied East Jerusalem, Israel says, but the UK insists the building “will not be closing”, and will operate as a “UK Mission”.

“We did not want it to come to this,” Israeli Foreign Minister Gideon Saar wrote on social media, as he said 20 diplomats and the consul general would leave Israel while a task force of seven could remain in the building “with a very limited scope of activity”.

UK Foreign Secretary Ed Miliband responded that some staff had been “temporarily withdrawn” for security reasons, but stressed the mission will “work with the Palestinian people”.

Israel said in September it would shut the consulate, in retaliation for UK sanctions on Israeli settlements in the occupied West Bank which are illegal under international law.

The UK government had made last-ditch efforts to persuade Israel not to close the British consulate ahead of Thursday’s deadline, after the Israeli government said it would close the consulate within 30 days of the UK sanctions announcement.

The consulate, which was first established in 1838, handles UK relations with Palestinians in Jerusalem as well as in the West Bank and Gaza.

It is distinct from the UK embassy in Tel Aviv, which is the UK’s main diplomatic hub with Israel.

Israeli Foreign Minister Gideon Saar said the country had implemented measures announced on 8 September in response to UK sanctions.

“The British Consulate in Jerusalem is closing its operations today. Accordingly, the sign of the British Consulate in Jerusalem has been removed,” he wrote on social media.

However, the British flag could still be seen outside on Thursday morning, and several staff were seen entering.

Saar said talks with the UK government had resulted in agreement on certain principles, including that “the consul general and 20 diplomats (including the consul general) are ending their duties and will leave Israel.”

But Saar acknowledged that the building is “the property of the British government” and said Israel had authorised “a task force of only seven diplomats with a very limited scope of activity” to operate in the building.

As a result of this agreement with the UK, he said, “no steps will be taken against Israel”.

Israeli media had been reporting that the UK had threatened to expel Israeli diplomats from London – raising the prospect of further damaging bilateral relations.

This agreement is a compromise of sorts and means – for the moment – the heat has been taken out of a dispute that could have further worsened UK-Israel relations.

Israel can claim that the British Consulate is “closing its operations”. A score of British diplomats, including the consul general, are leaving.

But Miliband says they are going only temporarily and only for their safety and security. He continues to insist Israel has no legal right to close the consulate.

“The UK government reiterates its long-standing view that East Jerusalem is occupied territory,” Miliband wrote in a statement.

Following discussions with the Israeli government, he said, the building “will not be closing” and will be known as the UK Mission, Jerusalem from Thursday.

However Miliband said an understanding had not been reached on “necessary assurances for the security and protections of our staff and premises”.

“Accordingly the UK has temporarily withdrawn a number of staff and families to ensure their safety and security,” he added.

The Foreign Office said the seven UK diplomats who remain will be “independent and operational” and continue to deliver vital services. Israel said they will provide “only a limited scope of activity”.

FCDO sources described the deal as a “good outcome” because the entire operation was not closing, as had been threatened. They said that maintaining a UK presence would help build back the mission in the future.

Speaking to the Today programme, Foreign Office minister Stephen Doughty explained: “The building remains open. We retain our presence, we continue having staff able to do important work engaging with the Palestinian Authority… and we are engaging in ongoing conversations with Israel on this matter.”

Asked if this was a political fudge, Doughty said “you can see what’s changed in terms of a name but crucially our presence remains”, adding that the “policies towards this Israeli government, which we fundamentally disagree with” would continue.

The foreign secretary made clear the UK reserved the right to take what he called “reciprocal action” but said he would not do so while “discussions are under way and credible”. That means any UK retaliation is unlikely before Israel’s elections later this month.