Two debt-ridden City bankers from Edgware tried to buy dangerous radioactive explosives for use by Muslim terrorists, the Old Bailey has heard.

Roque Fernandes, 44, from De Havilland Road; 53-year-old Abdurahmar Kanyare of Milling Road; and Dominic Martins, 45, from Du Cros Drive, Stanmore, are accused of planning to pass on hundreds of thousands of pounds worth of "red mercury" to a business contact in the Middle East.

Anti-terrorist police swooped to arrest the three men at the Holiday Inn in Brent Cross, after Martins was apparently recorded arranging a deal to buy red mercury, an alleged radioactive explosive, from a man who turned out to be News of the World journalist Mazher Mahmood.

The men are expected to claim they were entrapped by the controversial techniques used by the infamous "fake sheikh".

The prosecution claims that Fernandes and Martins tried to buy red mercury for Kanyare, an alleged buyer and seller dealing with the Middle East, between August and September 2004.

The pair, who worked at Deutsche Bank and the Queen's Bank Coutts respectively, had debts of more than £10,000 between them. Mr Martins' brother-in-law, known in court as Mr B, was approached for information on red mercury, it was claimed. The brother-in-law then contacted the newspaper, after claiming that Scotland Yard and Customs had not shown any interest.

Prosecutor Mark Ellison told the jury on Tuesday that the attempt to buy red mercury was a crime, even if it was impossible to achieve.

He said: "The tape-recorded evidence shows clearly that each of these defendants did agree and intend to actively pursue the purchase of this dangerous radioactive toxic substance.

"They knew it may have been used for acts of terrorism... What none of them knew was they had been negotiating with a journalist."

The court heard that Mr Mahmood became an authorised cover source for an anti-terrorist squad during his dealings with the gang.

Red Mercury is claimed to be worth around US$300,000 a kilogram.

Fernandes, Martins and Kanyare all deny conspiracy to enter a funding arrangement for the purposes of terrorism and conspiracy to possess an article for terrorist purposes between July 1, 2004 and September 25, 2004.