Mandelson, a prominent figure in Starmer's Labour Party for decades, was fired from his envoy role last year after previous revelations about his connections to Epstein.
Late on Sunday the former minister under Labour's 1997-2007 prime minister Tony Blair quit the party as well after more documents were released, saying he did not wish to cause "further embarrassment".
The newly released documents from the US Justice Department showed Mandelson pictured in his underwear, an image that circulated widely in UK media on Monday.
The Financial Times said the files also showed that accounts connected to Mandelson had received $US75,000 ($A108,000) from Epstein, prompting opposition politicians to call for a full investigation.
Mandelson said in a letter to the Labour Party that he was sorry to be linked once again to the "understandable furore surrounding Jeffrey Epstein".
But he said he believed that allegations about financial payments to him by Epstein were false and he would investigate.
Starmer's spokesperson said on Monday Mandelson should not be a member of the House of Lords, parliament's upper chamber that revises legislation, but added that the prime minister did not have the power to remove him.
"He (Starmer) is calling on those in the Lords to work with the government to modernise disciplinary procedures in the House to allow for the easier removal of Lords who have brought the House into disrepute," the spokesperson said, adding Starmer had instructed the cabinet secretary to review all available information regarding Mandelson's contacts with Epstein.
Many MPs said Starmer should go further and launch an official inquiry into allegations over financial payments.
"We need a full cabinet office investigation into how Mandelson and his husband took money from the pedophile Jeffrey Epstein while he was a Labour minister, and why Mandelson was appointed ambassador in the first place," Kemi Badenoch, the leader of the United Kingdom's opposition Conservative Party, said on X.
Mandelson could choose to retire from the House of Lords but ousting him would require the government to propose and pass a piece of legislation.
He is currently on a leave of absence.
A spokesperson for the Labour Party said on Monday it was right that he had quit the party and added that disciplinary action had already been underway prior to the resignation.
During the late 1990s, Mandelson played a central role in Labour's electoral success as Blair became prime minister.
Mandelson, also a former European Union trade commissioner, came under scrutiny last year when US lawmakers released documents including a letter in which he called Epstein "my best pal," leading to his dismissal as the UK ambassador.
Mandelson also had a turbulent earlier career in domestic politics.
In 1998, he quit as trade minister over a loan he received from a fellow minister to buy a house following questions over conflict of interest.
A second stint in the cabinet also ended in a resignation in 2001 when he was forced out over his alleged involvement in a passport scandal involving an Indian billionaire.
He was later cleared of acting improperly.
Separately, Starmer said on Saturday that Andrew Mountbatten-Windsor, formerly known as Prince Andrew, should testify before a US congressional committee following new revelations about his links to Epstein.
