His backers were demonstrating over the re-election of hardline President Mahmoud Ahmadinejad, who won by a landslide despite opposition claims the result was rigged.
The protesters defied a call from the country’s supreme leader for the demonstrations to end.
Eyewitnesses said around 3,000 people chanted “Death to the dictator!” and “Death to dictatorship!” near Revolution Square in the city centre.
Police beat protesters and fired tear gas and water cannon at them. At least one person is thought to have been injured by gunfire.
Witnesses said Mr Mousavi’s supporters lit a fire at the headquarters of the president’s backers in the capital.
Supreme leader Ayatollah Ali Khamenei had issued a strong warning on Friday to the leaders of the street protests that they would be responsible for any bloodshed.
Mr Khamenei claimed the June 12 vote was won fairly by Mr Ahmadinejad.
But in a letter to the country’s top legislative body, Mr Mousavi claimed poll rigging had been planned months ago and insisted the election must be annulled.
The runner-up in the election said if he was arrested, he urged people to go on strike.
Meanwhile, a suicide bomber has blown himself up in Tehran at the shrine of Iran‘s revolutionary founder Ayatollah Ruhollah Khomeini, injuring one person, reports say.
Foreign media are banned from reporting on non-official events but reports are still reaching the outside world of violence being used by the authorities.
The election result sparked fury among supporters of the losing candidates, who accused the government of rigging the poll and took to the streets in their hundreds of thousands in the biggest public protests since the 1979 Islamic revolution.
Iran‘s electoral watchdog, the Guardian Council, says it is ready to “randomly” recount up to 10% of the ballot boxes from the election, state TV said.
Writing in The Sun, he hit back at the Ayatollah’s claims. “Dignity has been shown by the protesters on the streets of Tehran,” Mr Miliband said.
“Ayatollah Ali Khamenei tried to blame the unrest on the West.
“But we will not allow anyone to turn scenes on the streets of Tehran into a battle between Britain and Iran. My message to the Iranian people is simple: the future of your country is for you to decide.
“But we need to know whether Iran is prepared to work with us to restore confidence in its nuclear intentions.”
The Ayatollah offered no concession to opposition supporters who are demanding the elections be cancelled and held again, sternly warning against further protests.
“The enemies (of Iran) are targeting the Islamic establishment’s legitimacy by questioning the election and its authenticity before and after (the vote),” the Ayatollah continued.
“But that depends on Iran being able to show to the world that its elections have been conducted fairly and that there is no unfair suppression of rights and individuals in that country.”
Supporters of runner-up Mr Mousavi have so far ignored the Ayatollah, holding huge unauthorised rallies.
Tens of thousands of Iranians had gathered in and around Tehran University to hear Khamenei’s Friday prayer sermon.
Some in the crowd were draped in Iranian flags. Others held placards with anti-Western slogans.
As passions soared, the crowd reportedly chanted: “Death to the UK, Israel and the US.”
He said “how they approach and deal with people who are, through peaceful means, trying to be heard” will signal “what Iran is and is not”.
Mr Khamenei’s speech followed six days of protests by Mousavi supporters.
On Thursday, tens of thousands of black-clad marchers bore candles to mourn those killed in earlier rallies.
Iranian state media has reported seven or eight people killed in protests since the election results were published on June 13.
Scores of reformists have been arrested and authorities have cracked down on both foreign and domestic media.