NEW YORK - Dubai's debt woes could further unhinge an already fragile U.S. commercial real estate market, as it illustrates the importance of that tiny emirate to global investors in an increasingly interconnected world.

A state-owned investment conglomerate Dubai World, with $59 billion of liabilities, set off a global stock market selloff this week after it said it wants to restructure its debt, including at its property subsidiary Nakheel.

This downturn has had more of a global impact, said Tony Ciochetti, chairman of Massachusetts Institute of Technology's Center for Real Estate in Cambridge, Massachusetts.

As I try to explain to my students, with a global economy, we're all attached at the hip financially in some way, shape or form, he added.

The Dubai news also cast doubt over the strength of the fledgling U.S. economic recovery, and the prospects for a bottoming of property prices.

On Friday alone, the Dow Jones U.S. Real Estate Index .DJUSRE fell 2.9 percent, nearly twice the decline of broader U.S. market indexes.

Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower, wrote Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida.

PRESTIGIOUS PROPERTIES

In the United States, Dubai World's portfolio includes several well-known properties, and the fallout could have a larger impact on the entire real estate market.

The company is a partner with casino operator MGM Mirage (MGM.N) in the $8.5 billion CityCenter project, which would add 6,000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms.

Nakheel, perhaps best known as the developer of Dubai's palm-shaped islands, also carries the Mandarin Oriental and W hotels in New York in its portfolio, and has a 50 percent stake in the Fontainebleau Miami Beach resort.

And, through its Istithmar affiliate, Dubai World controls the upscale retailer Barneys New York Inc DBWLDB.UL.

The main threat to U.S. commercial property from Dubai World woes may be potential for contagion, said Sam Chandan, chief economist at Real Estate Econometrics LLC in New York.

It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure, Chandan said.

Many have already been burned.

U.S. commercial real estate values have already fallen 42.9 percent from their 2007 peak, Moody's Investors Service said.

Last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8 percent, more than six times the year earlier level, according to Trepp LLC in New York.

In a November 23 report, Moody's analyst Nick Levidy said prices could bottom at 45 percent to 55 percent below their peak, implying an additional 5 percent to 28 percent decline, but in a stress case could drop 65 percent from their peak.

CURRENCIES AND SUBMARINES

Like U.S. investors, foreign investors were enticed through much of this decade to buy U.S. real estate aided by cheap credit and the hope that property prices would steadily rise for a long time.

Currency fluctuations also provided a boost.

And the U.S. dollar lost about one-third of its value against a basket of currencies .DXY since late 2002, making it easier for foreign investors to scoop up U.S. real estate even when valuations grew too rich for investors at home.

Dubai World's holdings go far beyond real estate. It has a 20 percent stake in Canada's Cirque du Soleil, and also invests in the global bank Standard Chartered Plc (STAN.L) and New York boutique investment bank Perella Weinberg Partners.

Other investments go farther afield -- or under water.

Dubai World is suing a former executive in a case arising from a wayward foray into submarine financing. (here)

But Ciochetti suggested it is premature to quantify Dubai World's impact on U.S. commercial real estate.

It is hard to focus on any one particular participant and then generalize about the whole market, he said.

It illustrates that very few places and participants in the commercial real estate market are totally exempt from the global economic crisis.

(Reporting by Elinor Comlay and Jonathan Stempel; Editing Bernard Orr

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