Banks outside the Gulf played down on Friday their exposure to Dubai debt, after fears the emirate could default and even derail world economic recovery prompted a sell-off in global markets.

Stocks from Tokyo to London were haunted by concerns that banks were exposed to state companies in Dubai, whose rise from a desert backwater into the business hub of the world's top oil exporting area had lured expatriate money and executives.

The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once lured celebrities and the super-rich.

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.

Anybody who thought the exit profile for markets from the great recession and the great financial crisis was going to be a smooth one was kidding themselves.

Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion.

The numbers pales in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010 as a result of the global credit crisis.

The events in Dubai in recent days are one of the hiccups if you like, one of the difficulties, which affirms that we were right to highlight the uncertainty ahead of us and that the road ahead could be a bumpy one, European Central Bank Governing Council member Athanasios Orphanides said.

International banks' liabilities related to Dubai World could be as high as $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.

French banks said their exposure to the Dubai crisis was limited and Italy's central bank said Italian banks should face no problems linked to the Gulf trade and tourism hub. Those sentiments were echoed by Chinese banks.

Those statements tempered losses in European stocks after investors around the globe fled shares, oil and other risky assets, fuelling flows into the low-yielding yen and safe-haven government bonds.

At this stage, this set back, looks to be one that is very much country specific, the SocGen note said.

ABU DHABI EXPOSURE

While European and Asian banks scrambled to distance themselves from the Dubai crisis, lenders in Abu Dhabi, a fellow member of the UAE federation and home to most of the country's oil, appeared to have major positions.

They lent heavily to Dubai firms at the height of the property boom that saw the emirate build the world's tallest tower but went bust with the financial crisis in 2008.

Abu Dhabi Commercial Bank has at least 8-9 billion dirhams ($2.18-$2.45 billion) 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 ($1.36 billion).

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

We are more concerned about the spillover effect within the UAE with CDS spreads in Abu Dhabi increasing, it said.

It remains unclear if the Dubai government will support the liabilities of government related entities and how ... neighbors will weather the storm.

The price of insuring Gulf debt surged again on Friday.

Credit default swaps (CDS) for Dubai rose more than 100 basis points but CDS prices were way below previous peaks in the global financial crisis late last year and earlier this.

For related graphic, see:

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Nakheel's Islamic bond prices extended losses, falling 30 points to a record low of 40, according to Reuters data.

The $3.52 billion bond at the center of the crisis, which was originally due to mature on Dec 14, 2009, had traded as high as 110 on Wednesday before the Dubai government said it would ask creditors to agree on a standstill of debt held by Nakheel and Dubai World until May 2010.

The debt crisis in Dubai has also pushed up debt insurance costs for other sovereigns in the Gulf, a wealthy region Western firms had turned to for help at the height of the credit crunch.

Analysts expect Dubai to receive financial support from Abu Dhabi, though it may have to abandon an economic model focused on developing swathes of desert with foreign money and labor.

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.

The biggest worry I have is whether this will trigger a repricing in the overall emerging market, said Arthur Lau, a fund manager in Hong Kong with JF Asset Management.

(For graphic of a simplified breakdown of the various holdings of Dubai World, Dubai Holding and Investment Corporation of Dubai click:

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(Writing by Lin Noueihed, Editing by Mike Peacock)

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