Dubai stocks hit a second day of turbulence today despite a restructuring plan from its debt-engulfed investment arm.
The Dubai and Abu Dhabi exchanges dropped by more than 6 per cent and 5 per cent respectively as the region continues to suffer after Dubai World last week asked for a six-month reprieve from paying creditors a nearly 60 billion US dollar (£36.4 billion) debt.
The company issued a statement today saying "constructive" discussions have begun with banks and outlining a debt-restructuring plan.
This followed comments from the city's government which suggested that Dubai would not stand behind the ailing company.
World stock markets were sent tumbling last week after the debt revelations.
But many have staged a comeback in recent days as fears about the potential for Dubai's woes to derail the global recovery with a second credit crunch receded.
In London, the FTSE 100 Index rose strongly with a near 1.5 per cent gain after finishing in the red yesterday. This follows strong gains across Asian markets overnight.
Arifa Sheikh-Usmani, an equity trader at Spreadex, said the proposals to deal with 26 billion US dollars (£15.75 billion) of Dubai World's debts calmed market fears over potential losses.
"Although we have seen a bounce this morning, investors still remain cautious with regards to the situation in Dubai as we wait to see which prize assets will inevitably be sold off," he added.
The Dubai and Abu Dhabi markets have been unable to share the optimism however and the markets registered record declines yesterday, dropping more than 7 per cent and 8 per cent respectively.
Dubai World said the restructuring would include about 6 billion US dollars (£3.64 billion) covered by Islamic bonds issued by its Nakheel subsidiary.
Nakheel, which is the developer behind Dubai's famous man-made palm tree-shaped islands, has a roughly 3.5 billion US dollar (£2.12 billion) bond due in two weeks.
But the restructuring will not cover other parts of the business, including investment arm Istithmar World and Ports & Free Zone World.
Dubai World wants breathing space on all debt repayments falling due until the end of next May.
The company's investments also include a six-tower hotel-entertainment complex in Las Vegas and Scotland's historic Turnberry golf course.
Other assets included in Dubai's network of sovereign wealth and investment firms include the QE2 cruise liner, the Emirates airline and the Travelodge budget hotel chain.
In an effort to ease concerns over the weekend, the United Arab Emirates' central bank vowed to give emergency support for any foreign or local bank facing losses from a potential default in Dubai.
But the city's top financial official, Abdulrahman al-Saleh, yesterday distanced the emirate from Dubai World's debt, saying that, while the conglomerate was government-owned, it was "established as an independent company".
He told Dubai TV that lenders should take some of the responsibility for the problems and said they lent money to the company on the basis of the feasibility of its projects, not on assurances provided by Dubai's government.
Deloitte has been appointed as an adviser to Dubai World to help it restructure the company's huge debts.
Financial stocks have been in the spotlight as investors fret about the level of exposure and possible losses.
According to the latest figures from the Bank for International Settlements, UK banks had a 50.2 billion US dollar exposure (£30.5 billion) to the United Arab Emirates at the end of June, although individual figures for Dubai are not available.
Many investors are hoping Abu Dhabi, Dubai's oil-rich neighbour, will step in to restore confidence by promising to foot any bills, but any help is likely to come with a hefty price tag.