The first government sukuk was listed on the London Stock Exchange as Britain reaffirmed its reputation as the main western centre for Islamic finance.

Bahrain chose London to list its second Islamic bond as it sought to encourage more European and conventional investors to buy the paper. The Gulf kingdom listed its first sukuk in Luxembourg in 2004.

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Significantly, more than 50 per cent of the paper was bought by European investors with the rest mainly bought by banks based in the Middle East.

Rizwan Kanji, head of Middle Eastern capital markets at Norton Rose, the law firm that helped structure the transaction, said: "You can attract more investors, particularly in Europe, if you list in London.

"London gives investors the reassurance that the bond is worth buying as it is a mature, highly regulated market that gives credibility to a deal."

The $350m Bahrain bond, structured to avoid paying interest in line with religious laws, raises the amount of sukuk on the LSE to $11bn. Investors are paid rent from underlying assets, in this case Bahrain's dry docks, instead of interest.

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Britain has led the way as a western centre for Islamic finance with government reforms designed to help level the playing field for fund-raising in the wholesale markets and moves to encourage Muslim home-owners to buy Sharia-compliant mortgages.

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Ministers are also considering launching a UK government sukuk, which would be the first western sovereign Islamic bond.

The Bahrain deal is also a sign the sukuk market is still active in spite of the credit squeeze, although the issuing price was much wider than this time last year. The five-year bond was priced at 75 basis points above US Libor. A similar bond would have issued at a spread of about 35bp in March last year.