Britain has asked for an Israeli diplomat to be withdrawn from the UK following the apparent use of cloned British passports by a Mossad hit squad.
An investigation by the Serious Organised Crime Agency (Soca) found that 12 British passports were copied when handed over for inspection to individuals linked to Israel and the Government believed it was "highly likely" a state intelligence agency made the fake documents.
In a Commons statement, Mr Miliband told MPs: "We have concluded that there are compelling reasons to believe that Israel was responsible for the misuse of the British passports."
It is widely alleged that the Israeli secret service Mossad was involved in the assassination of Mahmoud al-Mabhouh, the founder of Hamas's military wing, in Dubai.
As a sign of the UK's "deep unhappiness" the Foreign Secretary told MPs: "I have asked that a member of the Embassy of Israel be withdrawn from the UK as a result of this affair, and this is taking place."
Mr Miliband said there was no evidence that the 12 British passport holders had been anything other than "wholly innocent victims of identity theft".