Ok using character set cp1256 in connection string fixed the issue. So final connection string would look like this:
<add name="SybaseString" connectionString="DSN=myDatabase;UID=sa;PWD=sa123;CharSet=cp1256" />
How I found out? First I ran this command sp_helpsort to find out character set used by the database. There I saw that the char set is cp1256 so I used the same and now it is working fine.