Dubai's government said on Monday it was not responsible for the debts of its flagship conglomerate, offering little clarity on a plan to delay billions in debt repayments that has rattled world markets.

Dubai last week raised fears of a second bout of global financial turmoil by asking for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, a property developer at the heart of the emirate's boom.

Analysts said a statement by Dubai's leading finance official shed little light on how much investors could lose in the process. Financial markets in Europe continued to slide afterwards.

Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct, said Abdulrahman Saleh, director general of Dubai's department of finance.

Saleh told Dubai TV that banks did not need extra liquidity and that the market reaction to Dubai World's restructuring had been overblown.

Dubai made its announcement on the eve of a holiday, sending global markets into a tailspin as investors awaited details of what it would mean for Dubai World's $59 billion in debts.

Asian stocks rebounded earlier on Monday from last week's declines but markets in the seven-member United Arab Emirates federation, which includes Dubai and Abu Dhabi, plummeted when they reopened after the four-day Eid al-Adha holiday.

Dubai's market saw its biggest one-day decline since Oct 2008, and Abu Dhabi's bourse saw its biggest ever fall. Saleh's comments came after the markets had closed 7-8 percent down.

European shares fell more than 1 percent and U.S. stock index futures pointed to a lower opening on Wall Street, which have been worried by the possible ramifications of a debt default for banks and property investors.

(This announcement) means that the banks are going to have an issue, said Vyas Jayabhanu, head of investments at Al Dhafra Financial. We still expect some action by the federal government eventually, otherwise it will ruin the economic sector.

SUPPORT AT A PRICE

Dubai World had $59 billion of liabilities as of August, most of the $80 billion in total borrowing that has transformed what was a sleepy fishing town into a booming regional center for finance, investment and tourism.

Underpinning events since last week has been a debate on whether, when, or to what extent Dubai's rich neighbor Abu Dhabi would continue to pick up the tab for a collapse in the emirate's property-driven boom.

An Abu Dhabi government official said on Sunday the emirate would provide only selective support to Dubai firms -- comments that fueled speculation that Abu Dhabi, which has most of the UAE's oil, will demand a political price for any Dubai bail-out.

Jebel Ali Free Zone, another Dubai World subsidiary, made a scheduled coupon payment on its 7.5 billion dirham ($2.04 billion) Islamic bond, a source said on Monday.

The cost of insuring the debt of Dubai, Abu Dhabi and Dubai World against restructuring or default fell on Monday and debt prices stabilized from higher levels reached following the surprise announcement last week.

Abu Dhabi has strong incentives not to let Dubai collapse, said a note by Eurasia Group, but any support would come at a price.

Longer term, Abu Dhabi will use this opportunity to establish greater influence over political and economic decision-making in Dubai, and Dubai will consequently adopt a more conservative financial model, the consultancy wrote.

Contagion for Abu Dhabi from the restructuring of Dubai World debt will be unavoidable, ratings agency Moody's said on Monday, and could lead to downgrades for UAE bank ratings.

Moody's said the potential default of quasi-sovereign Dubai World changes long-held market assumptions regarding implicit government support of local credits.

That was reflected in the stock markets with Abu Dhabi's benchmark closing down 8.31 percent, compared to Dubai's index, which ended 7.3 percent lower.

(Reporting by Jason Benham, Rania Oteify, Tamara Walid and Nicolas Parasie, writing by Lin Noueihed, editing by Patrick Graham)

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