Ecuador granted political asylum to Julian Assange on Thursday, ratcheting up tension in a standoff with Britain which has warned it could revoke the diplomatic status of Quito's embassy in London to allow the extradition of the WikiLeaks founder.

The high-profile Australian former hacker has been holed up inside the red-brick embassy in central London for eight weeks since he lost a legal battle to avoid extradition to Sweden, where he is wanted for questioning over rape allegations.

Ecuadorean Foreign Minister Ricardo Patino said he feared for the safety and rights of Assange which is why he said his country had decided to grant him asylum.

"Ecuador has decided to grant political asylum to Julian Assange," Patino told a news conference in Quito.

Ecuador's decision takes what has become an international soap opera to new heights since Assange first angered the United States and its allies by publishing secret U.S. diplomatic cables on his WikiLeaks website.

Outside the embassy near London's famed Harrods department store, supporters made the announcement over a loudspeaker to cheers and clapping from protesters who had gathered outside the building in support of Assange.

Protesters shouted: "The people united will never be defeated!", bearing Ecuador flags and holding posters showing Assange's head that read "no extradition".

Before the decision was announced, Britain said it could use a little-known piece of legislation to strip Ecuador's embassy of its diplomatic status so that Assange could be detained.

"It is too early to say when or if Britain will revoke the Ecuadorean embassy's diplomatic status," a Foreign Office spokesman said before Ecuador's decision was announced. "Giving asylum doesn't fundamentally change anything."

"We have a legal duty to extradite Mr Assange. There is a law that says we have to extradite him to Sweden. We are going to have to fulfill that law."

The Ecuadorean government has bristled at Britain's warning. It's foreign minister said Britain was threatening Ecuador with a "hostile and intolerable act" and accused London of blackmail.

Britain's threat to withdraw diplomatic status from the Ecuadorean embassy drew criticism from some former diplomats who said it could lead to similar moves against British embassies.

"I think the Foreign Office have slightly overreached themselves here," Britain's former ambassador to Moscow, Tony Brenton, told the BBC.

"If we live in a world where governments can arbitrarily revoke immunity and go into embassies then the life of our diplomats and their ability to conduct normal business in places like Moscow where I was and North Korea becomes close to impossible."