Senior US officials urged British banking regulators two years ago to take more draconian action against Iranian banks suspected of financing nuclear and missile programmes, US embassy cables released by WikiLeaks show.

Hector Sants, chief executive of the Financial Services Authority, was forced to defend the regulator's record on Iran – particularly with regard to Bank Sepah – to the state department under-secretary Reuben Jeffrey and the US treasury assistant Patrick O'Brien.

At a meeting in May 2008, detailed in a cable a month later, the US encouraged the UK to "step into a leadership role" to deter a "nuclear-armed Iran" by stopping the activities of Iranian banks in London.

O'Brien told the FSA executives that Iran was using state-owned institutions – Bank Sepah, Bank Melli and Bank Saderate – to facilitate its proliferation efforts and its support for terrorism.

He expressed particular frustration about Bank Sepah, which was the subject of official international sanctions and was one of four Iranian banks in London.

"With four Iranian banks continuing to operate in London, O'Brien said that Middle East and Asian countries are not likely to take any action on its Iranian banks unless London moves first," the cable said. "If the UK acted publicly, the US would be willing to take message to the Middle East and Asia to press for similar action in other jurisdictions."

Governments can take combined action against institutions through the United Nations and the anti-money-laundering Financial Action Task Force, but the US officials wanted London to be willing to move before international sanctions were issued.

All Iranian banks operating in London are subject to sanctions. Bank Sepah declined to comment, Bank Melli did not respond while Bank Saderate strongly rejected any idea that the bank was involved in facilitating terrorism or proliferation programmes. Bank Saderate's Richard Wetton said the bank had asked for evidence of the accusations from the US. "These accusations are completely political," Wetton said.

The FSA applies a "fit and proper test" to decide whether individuals should be allowed to work at banks and O'Brien wanted the UK to look at the way this test was being applied to the London subsidiaries of Iranian operations.

Sants defended the FSA, saying it needed evidence of specific actions being taken by individuals. His colleague Phil Robinson said "the FSA had 'pushed the boundaries' of what it can do in looking at the parent entities in Tehran, and must prove the 'intent' of the person transferring the money," the cable reported.

"All the Iranian banks are 'keeping their noses clean' in the UK, explained Robinson, and the FSA can only address actions of the London-based subsidiaries," the cable said.

Iran was already unable to trade in US dollars and sterling as a result of international sanctions, and Robinson is said to have suggested the US hold talks with Brussels about limiting Iran's use of payment services in euros.

While the cable contained criticism of the UK, one sent a fortnight earlier told a different story. Acting political counsellor Leslie Tsou cabled Washington on May 23 2008 to say that the then foreign secretary, David Milliband, was "very aware of the centrality of financial measures, both multi-lateral and bilatleral, to the creation of effective pressure on Tehran."

The Foreign and Commonwealth Offices (FCO) would be "at the forefront of international financial efforts against Iran and will push its EU partners on Iran as hard as possible, FCO contracts told London Iran Water (Poloff) May 21," the cable said.

"UK officials, including the Financial Services Authority, will 'push the legal envelope' to limit Iranian banking activity by both Iranian and UK financial institutions in London and UK diplomats in Brussels will lead the charge for very tough language in the EU common position on Iran, Neil Kernohan, the sanctions officer for the FCO's Iran coordination group, said."