Iran's Revolutionary Guards Corps announced it had seized the Stena Impero in the strategic Strait of Hormuz (Picture: Morteza Akhoundi/ISNA via PA).
The UK will be seeking to put together a European-led maritime protection mission in the Gulf, the Foreign Secretary has announced.
Jeremy Hunt said he made the announcement with a "heavy heart" and added the UK had always sought to de-escalate the situation and did not seek confrontation.
But he made it clear he would not ignore what he called an act of "state piracy".
In a Commons statement, Mr Hunt said: "We will seek to put together a European-led maritime protection mission to support safe passage of crew and cargo in this vital region.
"We have had a constructive discussion with a number of countries in the last 48 hours and we will discuss later this week the best way to complement this with recent US proposals in this area."
Following criticism that defence cuts had left the Navy unable to protect British shipping, the Tory leadership hopeful acknowledged they had gone too far.
"I think the Navy in particular has become too small, so I hope whoever the next prime minister is will reflect carefully on what we can do to bolster our great Royal Navy," he said.
Mr Hunt also said the government has "dispatched HMS Duncan to take over from HMS Montrose".
HMS Duncan is expected to arrive in the region by Monday.
It follows the rise in tensions in the Gulf region with Iran.
Royal Marines boarded an Iranian oil tanker believed to be breaching EU sanctions while on its way to Syria, at the start of July.
During his statement, Mr Hunt said: "If Iran continues on this dangerous path they must accept the price will be a larger western military presence in waters along their coastline."
He further called on all British flagged ships to give notice when passing through the Strait of Hormuz, so "we can give them protection".
The Strait of Hormuz is one of the most important waterways in the world with nearly 19 million barrels of oil travelling through it every day.