I would appeal. as batleykhan says you'll be playing into their hands with the new fee etc. Make it very clear in the appeal submission why they are wrong. The way the appeals process works is that the consulate actually look at your reasons before it even goes to the appeal itself (if you submit the appeal through them). So if they think they have made a mistake they will overturn the decision straight away.
I would also write to the head of the visa section at the consulate AND i would also complain to the ambassador to let them know about your complaint. In the appeal submission let them know you have done this.
ALSO make it very clear in big bold letters to all that even if this goes to appeal and you win you will also be complaining to the
Parliamentary and Health Service Ombudsman (they deal with complaints about public bodies including the Foreign Office)
Collectively this will scare the living cr@p out of the ECO as it means they've a nut on their case who will give them huge amounts of admin to deal with and potentially get them all into trouble.
Again, make sure that ECO, head of visa section, AND ambassador know AT THE SAME TIME that you are appealing, that you are furious about this, AND that you're going to complain to the Ombudsman. The reason to do all this at the same time is that once the ECO has forwarded the appeal to the UK it's super unlikely they'll overturn the visa refusal because of the ambassador etc before the hearing has taken place.
If no response in 3 days, start chasing all them DAILY with phone calls, emails, and if you can get hold of it, their fax number. I know this all sounds completely OTT, but trust me, I've tried the "softly softly" approach. It doesn't work. When you go crazy on them they give in. You'll save yourself some money, doing all of us a favour, and maybe even some time as well if the gamble pays off
