THE UK'S stance on the British Council conflict has left the Kremlin bemused, bristling, and genuinely surprised. Riding an oil-fuelled wave of rising prosperity and increasingly confident on the world stage, officials are taken aback by what they see as Britain's arrogance and disregard for the rule of law.

How, diplomats wonder, can the UK refuse to comply with Russian law on Russian soil. "If you don't like the decision to close the British Council's regional branches then by all means challenge it through the courts," said one senior diplomat.

"But you can't just ignore it. What would happen if a Russian organisation in the UK refused to close after being told to do so by the government?" It would, he said, have no choice but to comply, even if it felt victimised.

At the heart of the row is a 1994 agreement governing the activities of the cultural body. The Kremlin insists it has expired, the UK says it is still in force.

The dispute is only the latest bout of bad feeling between the two countries. The Kremlin remains outraged by what it regards as the blatant politicisation of the 2006 murder of former intelligence officer Alexander Litvinenko in London. It claims the UK has presented scant evidence that former KGB bodyguard Andrei Lugovoi is guilty of the killing. London's request for Lugovoi to be handed over has met a wall of hostility. The Russian constitution prohibits the extradition of Russian nationals and the Kremlin claims the killing was a "provocation" designed to smear its reputation.

It was stunned when London expelled four Russian diplomats in retaliation last year, and responded in kind. It was equally shocked when Britain suspended co-operation with the FSB security service (the successor to the KGB), freezing joint anti-terrorism work. Russia's foreign minister, Sergei Lavrov, has made it clear that the clampdown on the British Council is a direct consequence of those "unfriendly" actions.

The UK's refusal to hand over British-based oligarch Boris Berezovsky, who is wanted in Russia on embezzlement charges, has also torpedoed relations. As has London's reluctance to extradite Akhmed Zakayev, a UK-based Chechen rebel envoy sought in Russia on terrorism charges. British courts claim neither man would receive a fair trial in Russia.

Add to that a high-profile spy scandal in 2006, in which four British diplomats in Moscow were accused of espionage and effectively forced to leave, and the British Council row fits a pattern of steadily deteriorating relations.

Foreign secretary David Miliband's use of language that Moscow saw as emotive put backs up even more last week. Privately, Russian diplomats complain that the foreign secretary is too inexperienced, and simply too rude, for the rarified world of international diplomacy.

His speech in the House of Commons, in which he claimed Russia's treatment of the British Council was "not worthy of a great country", caused a sharp intake of breath. "It was the speech of a defence minister or a general but not that of a foreign minister," said the same diplomat, who declined to be named.

In the Russian press, he has been cast as a Russophobe. Gleb Pavlovsky, a Kremlin-connected spin doctor, has suggested it is a quality Miliband inherited from his grandfather, a Polish-born immigrant to Britain of Jewish extraction. He has claimed Miliband's grandfather, now dead, fought in the 1920s under the command of Leon Trotsky eliminating white Russians. It is an allegation that has been hotly contested in Britain but in Russia it has stuck, in part because of Miliband's perceived Jewishness.

Anti-Semitism remains a potent force, with many Russians indignant that many of the oligarchs who plundered the country's wealth in the aftermath of the Soviet collapse were Jewish.

Russia's laconic foreign minister has also accused Britain of harbouring colonial instincts, a theme vigorously pursued by Soviet propagandists in the past.

"We, of course, understand that the historical memory, possibly related to nostalgia for colonial times, prevails," Lavrov said last week."But that is not the language in which one can talk to Russia," said Lavrov.

And with oil prices hovering around $100 a barrel and the Kremlin pushing the idea that Russia is again rising as a great power, Moscow wants respect. Meanwhile Britain, a country often portrayed in the state-controlled media as a US vassal, is increasingly viewed as a member of the awkward squad.

Though one of the largest foreign investors in Russia (BP harvests many of its revenues there), Britain has not been shy about criticising perceived democratic backsliding.

The UK ambassador to Russia, Sir Anthony Brenton, is regarded with particular disdain in official circles. That, in large part, stems from his controversial decision to attend an opposition conference hosted by President Vladimir Putin's foes.

He was the only foreign ambassador to do so and his presence there infuriated the Kremlin, not least because one of the conference speakers was Eduard Limonov, a man the authorities regard as a dangerous extremist.

The Kremlin has made its displeasure plain. Pro-Kremlin youth activists have harassed the ambassador and picketed the embassy. And as relations with Britain have nose-dived, Brenton has frequently found himself summoned to the hulking Stalin-era foreign ministry.

Though Russia's tightly controlled media has in the past made much of its skirmishes with Britain, it has remained oddly muted on the British Council row. Though front-page news in the UK, many Russian newspapers made little or no mention of it and it was relegated to less-prominent television news slots.

Russian rights activists took Britain's side, though, warning that the decision to close the offices smacked of Soviet-era campaigns to purge foreign influence.

"We hope that we will be joined by everybody who is outraged by this situation and who wishes to protest against the return to measures for combating foreign influence' that are Stalinist in spirit," Yuri Samodurov, a prominent activist, told Russian media.

Others, meanwhile, have been more sceptical. Yuri Drozdov, a former KGB operative, told Russian media that the British Council had close links to MI6.

"Of course there is a connection," he said. "The activities of the British Council are directly related to the intelligence services of Britain and the USA. If we analyse the make-up of the leadership of this operation, we see a number of people who have undergone special training in these organisations."

Britain's reluctant closure of the two British Council offices was cast as a victory for common sense.

"The British side at last did what should have been done long ago," said Mikhail Kamynin, a foreign ministry spokesman.

According to diplomatic sources, the UK needs to restore relations with the FSB security service and stop asking for Andrei Lugovoi, the chief suspect in the Litvinenko case, if the British Council's work is to be fully resurrected.

Neither move seems likely in the short-term given the current level of rhetoric and ill-feeling. Meanwhile, the Kremlin is likely to weigh up Miliband's blistering broadside. If it decides to strike back, it could target the British Council's last remaining office in Moscow that it claims is also operating illegally, something London denies.

That in turn would be likely to trigger a tit-for-tat response from the UK. Analysts say that the "nuclear option" would be for both sides to withdraw their ambassadors, effectively downgrading diplomatic relations. The dispute has not reached that level yet. But the fact that such a scenario is even being discussed shows how rancorous relations have become.