The office building situated at 1420 K Street NW has nothing obvious to commend it other than its prime location. Just a couple of streets from the north-west gates of the White House, it sits in the heart of lobbying land - the K Street corridor that represents one of the most crucial centres of power, influence and money in the United States.

This grey building, neighboured to one side by an off-licence and to the other by a travel agent, is home to the Lincoln Group, a previously little-known "business intelligence" company headed by a heretofore little known young Briton, Christian Bailey, an Oxford graduate and consummate net worker. He is at the centre of a mounting storm of controversy surrounding the Bush administration's covert propaganda war in Iraq.

It was recently revealed that Bailey's company was the recipient of a $100m (£56m) contract from Donald Rumsfeld's Department of Defence for buying space in Iraqi newspapers to place deliberately one-sided stories written by US "psy-ops" troops, at a time when the chaos of Iraq makes genuine journalism all but impossible and when journalists risk their lives on a daily basis to report the truth.

As part of the project - in which the US military hid its involvement - Lincoln Group staff paid Iraqi journalists to write similarly misleading stories about US forces and the Iraqi government that ignored anything negative about the occupation. One headline read: "Iraqis Insist on Living Despite Terrorism."

The revelations have created a furore. President Bush is said to be "very troubled" by the news, while on Capitol Hill members of both the Senate and House armed services committees demanded inquiries. The Pentagon said it would launch an immediate investigation.

Much is unclear about the Lincoln Group, its youthful executive vice-president and his string of previous companies that have left only the faintest paper trail. Indeed, Christian Bailey may not be his real name: a number of student associates said at some point during his four years that he changed his name from Yusefovich - an unlikely surname for someone called Christian.

The Independent has been unable to confirm this. Yet the details known about Bailey and the contract his company won provide a remarkable insight into the way influence and power operate in Washington. Just two years after arriving here, Bailey, 30, who has a penchant for socialising, has apparently developed contacts both within the Republican establishment and the world of private intelligence.

Senator John Warner, the Republican chairman of the Senate Armed Services Committee, said of the false news operation: "I remain gravely concerned about the situation." Since the controversy broke Bailey has kept a low-profile and has offered just the fewest public words about his organisation and what it does. (He failed to respond to requests for an interview.) It also appears a number of internet references linking him to the Republicans can no longer be found.

Yet it is clear the Lincoln Group and its contract with the Joint Psychological Operations Support Element, part of the Pentagon's Special Operations Command, is inextricably linked with Bailey. He apparently named the company and its various offshoots after Lincoln College, Oxford, from which he graduated in 1997 with an MA in economics and management.

Many observers have been surprised Bailey, from Surrey, has been awarded such a sizable contract, give that he appears to have no experience in public relations. Indeed, since he moved to the US in the late 1990s, he has spent much of his time in private finance, working in hedge funds in San Francisco and New York.

It appears he has been especially interested in new technology markets. A brief biography presented by the organisers of a conference held earlier this year in Dubai at which Bailey was listed as a speaker, said he had worked in Palo Alto, California, "where he advised portfolio companies and identified, evaluated and developed emerging technology investments".

The Briton has always enjoyed a reputation for business. Several Oxford associates said it was rumoured that the popular student kept two computers in his room to monitor the stock markets. Bailey has said he founded and sold two companies while an undergraduate. "He was quite enterprising, I believe," said Graham De'ath, of Winchester, who was in the same year.

Kate Smurthwaite, who is now a stand-up comic but shared a flat with Bailey in his third year, told The Independent that the young entrepreneur hired a personal assistant to work for him in his student digs as he ran an operation selling self-help advice on cassettes.

He also had a reputation as a hard-working networker. While in New York he became treasurer of the Oxonian Society, a club for graduates of Oxford and other universities, which invites high-profile figures to speak. He was involved in at least one charity fundraising effort with other hedge-funders. Perhaps of more significance, Bailey became the co-chairman of the New York chapter of Lead21, a networking group for young Republicans. At least a dozen of its members have gone on to work for either the Bush administration, Congress or the Governor of California, Arnold Schwarzenegger.

During a Lead21 trip to the Republican National Convention in New York last autumn, Bailey said of his colleagues to one reporter: "These are going to be the big supporters, the big donors, to the Republican Party in five years."

According to other members, Bailey was very popular. Auren Hoffman, chair of Lead21 and chairman of the Stonebrick Group, a San Francisco-based consulting firm, said Bailey was a good friend. "Christian is a terrific guy personally. Everyone I know that has ever met him instantly likes him. He is very likeable and charming. Very intelligent. Very interesting."

When he moved to Washington, his reputation as a networker continued. He often hosted parties at home and mixed with a set of young, up-and-coming journalists and congressional staffers. He enjoyed a reputation as a good cook, a welcoming host and for making cappuccinos with a machine in his kitchen. He also enjoyed flying: Federal Aviation Administration records show that he is qualified to fly aeroplanes and helicopters.

How and when did Bailey make the switch from hedge funds to private intelligence and PR? One clue is provided by the Alternative Investment News newsletter of 1 March 2003, just weeks before the invasion of Iraq. It reported Bailey's hedge fund, Lincoln Asset Management Group, had launched a buyout fund to start buying companies in the defence and security industries. Bailey said he had obtained commitments of $100m from six institutional investors, whom he declined to name.

Apparently with an eye to the preparations for war being made in the deserts of northern Kuwait, he added: "[The] timing is extremely good to look at defence companies." Shortly afterwards, a subsidiary called Lincoln Alliance Corp was established, offering what it called "tailored intelligence services [for] government clients faced with critical intelligence challenges".

By last autumn Bailey had formed another Lincoln subsidiary, called Iraqex, which seems to have formed a partnership with another American PR firm called Rendon, famous in Washington for having promoted Ahmed Chalabi and his Iraqi National Congress.

At some point Bailey also went into business with Paige Craig, 31, a former US Marine who served in Iraq and elsewhere. [Bailey and Craig are flatmates in a fashionable part of Washington, close to U Street. The flat is just yards away from Café Saint- Ex, popular with young professionals.]

In September, Iraqex won a $6m Pentagon contract to design and execute "an aggressive advertising and PR campaign that will accurately inform the Iraqi people of the Coalition's goals and gain their support". It appears one project was an attempt to persuade the Iraqi and US public that Iraqi troops played a vital role in last year's effort to clear Fallujah.

A strategy document obtained by ABC News revealed the Lincoln Group was seeking to promote the "strength, integrity and reliability of Iraqi forces during the fight for Falujah". In reality, most assessments suggest the small number of Iraqi troops present were minimally involved.

But the real breakthrough came this summer when Bailey's company, having again changed its name to the Lincoln Group, secured a $100m contract for information and psychological operations. Part of the contract was for placing "faux" news stories in some of the 200 Iraqi-owned newspapers that now exist.

Pentagon officials have said that, while not factually incorrect, these stories only presented one side of the story and would not include anything negative about the occupation. It was reported this week that the $10Om was part of a larger $300m "stealth PR effort" in a number of countries around the world.

One PR consultant with experience of the private-intelligence sector, said: "Doctrinally, this is all part of what the military calls information superiority. It is part of the plan for what they call, rather upsettingly, full-spectrum dominance. The truth is that it is just propaganda. And there has always been propaganda in a war. And this is a war, so ... thus runs the thinking."

According to reports from former Lincoln employees, their main task was to take news dispatches, called storyboards, which had been written by specially trained psy-ops troops, have them translated into Arabic and then distribute them to the newspapers. They would also deal directly with members of the Iraqi media through something called the Baghdad Press Club, a group of journalists who were paid to write and publish positive stories. Typically, Lincoln paid newspapers between $40 and $2,000 to run the articles as either news or adverts.

To help it carry out its work, Bailey and Craig - the latter is apparently responsible for most of the Iraq-based end of the business - have reached out to some of the foremost specialists in security and intelligence. Among "advisers" listed on their website is Andrew Garfield, a former British military-intelligence officer and specialist in psychological warfare who has advised the Ministry of Defence. In an e-mail to The Guardian Garfield confirmed his collaboration with Lincoln but gave no details.

Another adviser is Colin Rees Mason, who two years ago received an OBE for his service as a lieutenant-colonel in the Territorial Army, and who for almost 20 years has been a consultant to the Centre for Operational Research and Defence Analysis, a subsidiary of BAE Systems.

The Lincoln Group also has Republican links. Among lobbyists registered to represent it are Charles Black, an adviser to Presidents Ronald Reagan and George Bush Sr and Marlin "Buzz" Hefti, who served as a director at the Pentagon.

Lincoln Group also lists as a partner the Virginia-based private intelligence group WCV3 Security. Last year that company's executive vice-president took unpaid leave to produce Stolen Honour: Wounds That Never Heal, a film that, at a critical time in the presidential election campaign, condemned the Democrat John Kerry and questioned his version of events in Vietnam.

Despite the concern on Capitol Hill about the placing of false stories in foreign media outlets - a practice that dates back to the Cold War - it is unknown what will be the outcome of the Pentagon's investigation. It is also unclear how the controversy has affected the ability of the Lincoln Group or Bailey to fulfil its contract. In a statement the company said: "Lincoln Group has consistently worked with the Iraqi media to promote truthful reporting across Iraq. We counter the lies, intimidation, and pure evil of terror with factual stories that highlight the heroism and sacrifice of the Iraqi people and their struggle for freedom and security."

Additional reports: Simon Usborne