Nakheel, the developer of palm-shaped islands owned by Dubai World, has a USD 3.5 billion Islamic bond maturing on December 14 and more debt worth 3.6 billion dirhams ( USD 980 million) due on May 13 2010. Limitless, another Dubai World developer, has a USD 1.2 billion Islamic bond maturing on March 31 next year. "It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations and most analysts were of the view that Nakheel's commitments would be met," said Shakeel Sarwar, head of asset management at SICO Investment Bank.

"Abu Dhabi has been supportive of Dubai, but it appears this support is not enough for Dubai to meet its obligations on time." The cost of insuring Dubai government debt against default using 5-year credit default swaps soared, jumping over 100 basis points to 420.6 from a close of 318 one day earlier. Nakheel's Islamic bond prices fell more than 20 points to 87. "The market had expected a timely repayment of the USD 3.5 billion sukuk and spreads had narrowed. This will destroy a lot of confidence," said Eckhart Woertz, economics program manager at Gulf Research Center. "The standstill requests comes as a surprise, especially after additional finance from Abu Dhabi has been raised," Woertz added. Dubai's economy has been hit hard as the global credit crunch saw an end to a six-year boom in the region and sent the emirate's once-flourishing property sector into decline. In a separate move the government said was not connected to the Dubai World restructuring, Dubai raised a further USD 5 billion as part of a USD 20 billion bond programme launched this year, half of what it previously said it would raise. The USD 5 billion tranche had a maturity of five years and paid four percent interest and was placed with two Abu Dhabi-controlled banks, the National Bank of Abu Dhabi NBAD.AD and Al Hilal Bank, officials said. (c) Reuters