Dubai's debt troubles have exposed the fallacy of its once much-vaunted model of raising shining cities in the desert with foreign residents, finance and labor.

They have also set in train a power shift toward Abu Dhabi.

On Wednesday, Dubai's government said it will ask creditors of two of its flagship firms, Dubai World and property group Nakheel, for a debt standstill as it restructures the Dubai World group.

Questions are now being raised by investors about whether Abu Dhabi will bail out Dubai and at what price?

Though Abu Dhabi is the United Arab Emirates capital, the seat of most of its oil wealth and the largest of the seven self-governing emirates by size, it took a back seat in recent years as Dubai undertook spectacular real estate projects as a tourism and finance hub.

Dubai's population rocketed to 1.5 million, as white-collar professionals from around the world took plum jobs in a country marketed as a liberal enclave in the Gulf sun.

An army of Asian workers was hired to construct the glitzy projects, drawing accusations of slave labor from rights groups, while Dubai's own citizens dwindled to a small minority, bringing strains as cultural values mixed warily.

Since the financial crisis, the credit-driven boom has ground to a halt, many of the more affluent foreigners have left and the freewheeling emirate -- a dynastic autocracy under the Al Maktoum family -- is left with up to $80 billion in debts.

Abu Dhabi has stepped in to help, but avoided a direct bail-out of its neighbor -- but it could be drawn into more direct backing if its own prestige is affected by Dubai's woes.

In exchange for Abu Dhabi providing cash, it wants Dubai to eliminate or reform a lot of the tangled web of competing of Dubai-based companies, Eurasia Group said on Wednesday.

Dubai has been resistant to some of Abu Dhabi's demands, and its leaders have seen their political power and prestige dissipate in wake of the financial crisis.

The federal central bank -- effectively under Abu Dhabi control -- took up $10 billion of a $20 bond issue by Dubai government earlier this year, and this week two Abu Dhabi banks took up $5 billion.

POWER SHIFT

The fiasco is playing into Abu Dhabi's ambition to unify UAE policies, clean up the Gulf state's image and project the country as a political power in the region.

The power shift is a sensitive issue -- Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum said this month the UAE was one big family and detractors who talk of division should shut up.

One of the things the UAE is striving to be is a political power. It is coming of age and wants to be recognized as a regional power, said political scientist Abdul-Khaleq Abdullah.

The UAE's nuclear energy plans are one sign of the new role the U.S. ally seeks, challenging a traditional Saudi hegemony in the Gulf. The UAE in May pulled out of Gulf monetary union plans over Saudi insistence on hosting a regional central bank.

The UAE is in the final stages of gaining a nuclear power cooperation deal with Washington which will see it become the first Gulf Arab country to go down that path, leading to even closer political and economic ties with ally Washington.

It is inevitable that having a supervised active nuclear reactor will add to the UAE's already significant clout in the region, said UAE commentator Sultan Al-Qassemi, a member of one of the UAE ruling families.

IRAN PRESSURE?

Analysts say Abu Dhabi and Washington have pressured Dubai to take a tougher line on Iran, as well as overcome a reputation as the Wild West of the Middle East that had threatened Washington's approval of its nuclear activities.

U.S. Congressmen raised concerns about the UAE's relationship with Iran -- mainly via Dubai -- and the UAE had to give assurances it would not use American technology to develop a nuclear weapon or help others in the region do that.

The UAE backs the U.S. policy seeking to prevent Iran having the ability to develop nuclear weapons. Iran denies any such intention. The UAE claims three Gulf islands which Iran holds.

With a large Iranian expatriate population, Dubai is a major exporter to Iran and a re-export center for Iranian goods. After the September 11 attacks on U.S. cities, the UAE cracked down on money laundering and strengthened export controls.

There is incredible (American) pressure, said British historian Christopher Davidson. Dubai's role and autonomy in the federation is really something that Abu Dhabi and Washington can't allow to continue. It's a security liability.

(Editing by Samia Nakhoul)

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