Concern over debts at Dubai's utility provider and losses at Nakheel, builder of the emirate's palm-shaped islands, hit markets on Wednesday, drowning out assurances by top officials that Gulf economies were sound.

The Dubai debt saga has shaken global investors since the emirate's shock November 25 announcement that it sought a standstill on Dubai World debt as it restructured the sprawling state firm, which builds and operates everything from ports to luxury flats.

Nakheel, the developer at the center of Dubai's debt crisis, added to already battered sentiment on Wednesday after its financial statements showed liabilities jumping 7 percent in the first half to a loss of more than $3.6 billion.

While the Dubai government has tried to ring-fence profitable firms from the $26 billion restructuring at Nakheel's parent, Dubai World, its debt woes have led to credit downgrades for all government-linked firms amid investor fears that state aid would not be forthcoming in times of trouble.

Ratings agencies said such downgrades could lead to an accelerated payment clause for the $2 billion debt of Dubai's power and water provider, though a DEWA official dismissed the report as speculation. Adding to confusion among investors, Dubai's finance chief said on Tuesday the Gulf business hub would need more than six months to restructure Dubai World. A banker close to discussions between Dubai World and its creditors said the firm had yet to show them a proposal.

Underscoring the grim mood, a group representing a potentially blocking minority of holders in Nakheel's bond has written to Dubai World rejecting a standstill, a source familiar with the matter said on Tuesday.

Investors, especially foreign institutions, want a strong statement from Dubai officials that they've found a clear way to help these companies, said Samer al-Jaouni, General Manager of Middle East Financial Brokerage Co.

There's no reason to buy back into the market without having a clear picture on what's going on. Confidence has been lost.

Dubai's stock index tumbled to a 32-week low falling 5.9 percent at 0640 GMT with construction and real estate companies all down by the daily limit.

Asia-focused bank Standard Chartered, which is one of Dubai World's creditors, said any losses it suffers in Dubai were unlikely to be material. Its shares have fallen 12 percent since Dubais's announcement.

Nakheel's Islamic bond maturing on December 14 fell 3 points to 47 cents on the dollar on Wednesday, compared with 110 just before Dubai World's announcement.

This does not really enhance Nakheel's ability to meet near-term obligations, said Roy Cherry, vice president research, real estate and construction at Shuaa Capital.

WHAT'S FOR SALE?

Dubai's government has said its assets, which include Emirates airline, would not be involved in any firesale aimed at plugging Dubai World's debt, though some assets belonging to the conglomerate itself could be sold..

Dubai World has already said assets from Istithmar World, owner of U.S. luxury retail chain Barneys, profitable port operator DP World and Jebel Ali Free Zone would not be part of the wider $26 billion debt restructuring program.

On Tuesday, it added its ship building firm Dubai Drydocks World to the list of businesses not for sale.

But in a sign that Dubai World may struggle to keep its prized assets, Istithmar World lost its W Hotel in Manhattan in a foreclosure auction on Tuesday for $2 million, after buying the property for $282 million in 2006.

Dubai's predicament stands in stark contrast to the boom years when it bought assets around the world, lured celebrities with luxury villas and exclusive hotels and courted the media with projects such as the world's tallest building.

But whereas neighbors funded growth with proceeds from soaring oil prices, Dubai borrowed heavily to transform itself into the trade and tourism hub of the region. Creditors lent Dubai companies on the implicit understanding that they would be backed by the federal government of the oil-exporting United Arab Emirates, of which Dubai is a member.

UAE President Sheikh Khalifa bin Zayed al-Nahyan sought to reassure markets again on Wednesday, saying the world's third-largest oil exporter was determined to contain the impact of the global crisis on its solid economy.

Ali al-Naimi, top oil official from regional powerhouse Saudi Arabia, echoed those remarks in a speech in Dubai saying Gulf economies were strong despite anxieties over financial strains in the regions.

(Additional reporting by Inal Ersan, Rania Oteify, Tamara Walid, John Irish, Enjy Kiwan, Matt Smith and Martin Dokoupil; Writing by John Irish, Editing by Lin Noueihed)

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