I am currently pursuing a Masters degree in Literature, and I see potential in further research on the current topic of my dissertation for a PhD in the future. I have been told that an Honours thesis cannot be used as a foundation for a Masters dissertation, so i am wondering if a Masters dissertation can be used as a base for a PhD dissertation later on.
I have never heard of any institution imposing a restriction such that your doctoral research is in a different field to your Master's research.
As long as your PhD research is a significant body of original research that greatly extends your Master's experience and appropriately cites any previous findings, there should not be a problem.
Indeed, in some countries it is possible to convert your Master's research into a PhD. For instance, if you are 6 months into a project and decide you want to greatly extend the scope of your research, you may be allowed a conversion. Bear in mind that where I live, a Master's degree is not a requirement to begin a PhD (you only need an honours degree, which is 1 year of postgraduate lectures and a small research project).