Allen & Overy (A&O) has emerged as the lead adviser to the arranging banks on the highly controversial $492m (£346m) bond issue by Iran – the first foreign bond to be issued by the country since the Islamic revolution of 1979.

The issue has split fund managers at the world's top investment banks following US President George Bush's statement that Iran was part of an "axis of evil" that supports terrorists in light of the 11 September attacks on New York.

Many Wall Street banks are refusing to support the bond issue, claiming that European willingness to invest in countries accused of terrorism is morally wrong.

A&O, led by finance partner Roger Wedderburn-Day, is advising lead arrangers BNP Paribas and Commerzbank on the bond sale, which is currently being marketed in Europe's main financial centres.

The instruction is sensitive for A&O, which is marketing its Middle Eastern finance practice while at the same time attempting to build a top-tier New York office – a move dependent on its relationships with the traditionally conservative Wall Street investment banks.

A&O refused to comment about the bond issue, although both Commerzbank and BNP Paribas confirmed they had instructed the firm on the issue.

Iranian firm Atieh is advising the banks on local issues with the in-house legal team of the country's central bank advising the Iranian Government.