Banks play down Dubai debt threat

But the prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.

Wall Street, which was closed on Thursday for the U.S. Thanksgiving holiday, opened sharply lower on Friday over fears of renewed financial turmoil. Banks with Gulf investors were badly hit, with Citigroup down over 3 percent.

"Dubai is deeply connected with the global community and people are worried about a domino effect with other points of the financial system," said Kevin Caron, U.S.-based market strategist at Stifel, Nicolaus & Co.

BANK EXPOSURE

European and Asian banks scrambled to distance themselves from problems in the Gulf trade and tourism hub, helping European stocks reverse earlier losses and hit session highs as the market reassessed the significance of Dubai's problems.

"We have seen a classic risk aversion reaction in the markets over the past 24 hours. The dollar has slumped, the yen is stronger," a Societe Generale note said. "At this stage, this setback looks to be one that is very much country specific."

Lenders in Abu Dhabi, a fellow member of the UAE and home to most of its oil, have lent heavily to Dubai and could suffer.

Abu Dhabi Commercial Bank has at least 8-9 billion dirhams (1.3 billion pounds) exposure to Dubai World and related entities, forcing the bank to book more provisions, a senior executive of the bank said. First Gulf Bank has at least 5 billion dirhams.

JP Morgan said it was less concerned about global banks' direct exposure to Dubai World and was not worried about Abu Dhabi, which is sitting on hundreds of billions of dollars.

"We are more concerned about the spillover effect within the UAE," it said in a note. "It remains unclear if the Dubai government will support the liabilities of government related entities."