Standard Chartered bank ran a rogue unit that schemed with Iran's government to hide more than $250bn (£160bn) in illegal transactions for nearly a decade, according to a scathing report by New York regulators that may put intense pressure on the management of the UK-based bank.

According to the report filed by the New York state department of financial services (NYSDFS), when warned by a US colleague about dealings with Iran, a Standard Chartered executive caustically replied: "You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."

About 60,000 transactions were involved between 2001 and 2007 and the bank faces losing its ability to trade in the US if the allegations are proven.

The regulator has demanded a meeting with the bank on 15 August and just hours before trading began in its shares in Hong Kong this morning the bank insisted it "strongly rejects the position or the portrayal of facts as set out".

Shares in the British bank dropped sharply in the final seconds of trading; the accusations were published just as the London stock market was closing. The shares slumped 6% to £14.70 to become the biggest faller in the FTSE 100.

The attack on Standard Chartered – which is accused by the US of "wilful and egregious violations of law" – could be a severe blow to the reputation of the bank which, until last night, had been regarded as the most solid of any of the London-listed banks after the 2008 taxpayer bailouts, the more recent Libor-rigging scandal at Barclays and the money laundering offences at HSBC.

Its top management team – the chief executive, Peter Sands, and the finance director, Richard Meddings – are held in such regard that only last week they were fending off questions about their potential candidacies for governor of the Bank of England or joining Barclays in the wake of the Libor scandal.

The 27-page report claims that Standard Chartered bankers helped Iranian clients skirt US financial sanctions against their country for nearly a decade.

Benjamin Lawsky, superintendent of the NYSDFS, said a Standard Chartered subsidiary in New York had also sought to do business with other US-sanctioned countries, including Libya, Burma and Sudan.

It is the latest blow to the reputation of the City, already criticised in Washington following the HSBC money-laundering debacle and JP Morgan's multibillion-dollar trading losses at its London office.

"It seems to be that every big trading disaster happens in London," New York congresswoman Carolyn Maloney told a Congressional panel investigating the JP Morgan fiasco in June.

The New York regulator has provided emails between members of Standard Chartered staff. In one the head of the US operations warned, among others, the executive director of risk in London, that the dealings with Iran could cause "very serious or even catastrophic reputational damage" to the group.

The email, dated October 2006, warned: "There is equally importantly potential of risk of subjecting management in US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability." It was this memo that provoked the response about "you f---ing Americans".

Financial transactions with Iran have been subject to US sanctions since 1979. Limited, highly scrutinised transactions known as "U-turns" were allowed as long as the money ended up in non-Iranian banks. In 2008 the US Treasury revoked authorisation for U-turn transactions, because it suspected that Iran was using its banks to finance nuclear weapons and missile programmes, and terrorist groups including Hezbollah and Hamas.

According to Lawsky, Standard Chartered set up an operation known as Project Gazelle, aimed at helping Iranian banks put money through the US financial system. The bank is alleged to have removed codes to hide transfers for Iranians.

"For almost 10 years, SCB [Standard Chartered bank] schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250bn, and reaping SCB hundreds of millions of dollars in fees.

"SCB's actions left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity," the regulator said. "In short, SCB operated as a rogue institution."

In one example from 2001 detailed in the report, Standard Chartered was approached by CBI/Markazi, Iran's central bank, to act as recipient for daily oil sales from the National Iranian Oil Company.

Iranians warned the bank that disclosure of their identities to US banks would cause "unacceptable delays in clearing funds", according to the report.

The bank took legal advice and was told it "should ascertain that the payments are authorised", according to the report.

Instead, it "conspired with Iranian clients to transmit misinformation to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties", the report claims.

Standard Chartered, which is one of the top five largest banks in the UK by market value, was unprepared for the scale of the criticism, despite having made disclosures in previous annual reports – and in its interim report last week – about discussions with the US over breaking sanctions.

The bank stressed that it had complied with the regulations. "Well over 99.9% of the transactions relating to Iran complied," the bank said as Asian markets

opened for Tuesday.

Discussions continue and the bank said it was "surprised to receive" the

regulatory order. "The group takes its responsibilities very seriously and seeks to comply at all times with the relevant laws and regulations," the bank said.