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Melli Bank plc and its parent company Bank Melli were hit with European Union sanctions in June to up pressure on Iran to halt uranium enrichment and its atomic programme that Western leaders believe is part of a weapons drive.
EU officials said the move, alongside parallel United Nations sanctions adopted since 2006, was prompted because the bank had connections with Iran's nuclear and weapons programmes.
But the bank's lawyer Richard Gordon told London's High Court the sanctions against the subsidiary were illegal and should be suspended pending a European-level court ruling.
Melli Bank plc was strictly regulated by Britain's Financial Services Authority watchdog and was both legally and functionally distinct from its parent company, with which it had an "arm's length" relationship, he said.
The bank had never been specifically cited in any UN resolution nor designated as being subject to any sanction, while there was no evidence to suggest it was involved in helping Iran's nuclear drive, he added.
As such, the Europe-wide sanctions were disproportionate and freezing Melli Bank plc's assets without evidence or a time limit was illegal under EU law, he told two judges.
Britain's Treasury finance department said in its sanctions notice on June 24 that Melli Bank plc and its parent company were both "a facilitator for Iran's sensitive activites."
They had also "facilitated numerous purchases of sensitive materials for Iran's nuclear and missile programmes" and "provided a range of financial servies on behalf of entities linked to Iran's nuclear and missile industries."
Lawyer Jonathan Swift, for the Treasury, said Melli Bank's bid to apply for a judicial review of the decision in the English courts should be refused and the sanctions allowed to stand.
The bank had already asked EU judges to intervene and as such it would be "inappropriate" for English courts to suspend the order in the meantime.
A ruling is expected Wednesday, the judges said.
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