Investor confidence in Dubai took a fresh knock on Tuesday as officials dithered over a rescue for debt-laden state conglomerate Dubai World and ratings agency Moody's slapped a downgrade on government-related debt.

You can usually take the view that no news is good news, but in Dubai's case it's quite the opposite -- investors need to hear some developments on Dubai World's restructuring, said Julian Bruce, EFG-Hermes director of institutional equity sales.

Leading lenders met Dubai World on Monday to negotiate over a $3.5 billion sukuk, the world's largest, issued by Dubai World subsidiary Nakheel, builder of Dubai's palm-shaped islands.

That bond is scheduled to be repaid on December 14, in less than a week, but longer term, creditors also face a request for a six month standstill on $26 billion of debt.

A banker close to the discussions said Dubai World had not yet shown the creditors a proposal.

You've got to think these guys are either very clever or don't know what they are doing, the banker said.

Shares in some lender banks including Royal Bank of Scotland , HSBC and Standard Chartered took a knock, with traders attributing the drop in part to a Bloomberg report that said Nakheel had suffered a $3.65 billion half-year loss.

While creditors and ratings agencies sought more clarity on plans to restructure the company that spearheaded Dubai's rapid growth, a senior government official suggested on Tuesday the overhaul would take more than half a year to complete.

The period of six months would be too short for a full restructuring. The six month period would focus on the creditors, the contractors and so on, Abdulrahman al-Saleh, head of the Dubai finance department, told Al Arabiya TV.

Moody's said investors should heed the Dubai government's insistence that it would not bail out corporate issuers of debt. Moody's no longer believes it appropriate to assume timely support, it said.

Dubai World is a flagship company of the emirate, building everything from ports to luxury apartments. It is owned by the Dubai government, but state officials have said they will not sell other government assets to bail it out, so the company's debt is trading at about half its face value.

Dubai's government would support the group as an owner, Saleh said, without being more specific.

The government is present to provide backing as an owner ... we would like to emphasize the distinction between guaranteeing and backing. The company receives large backing from the government since its inception, he said.

CONFUSION REIGNS

Further confusion hit home when Saleh said a Dubai fund had given Dubai World $2.45 billion. A source later clarified that the money was not new, and was made as part of $10 billion aid made available to businesses in February.

Dubai stocks slid and debt markets were battered by the continued uncertainty.

The cost of insuring Dubai's debt against restructuring or default rose to 515.6 basis points in the five-year credit defaults swaps market, compared to a U.S. close of 500 bps. Nakheel's sukuk, maturing this month, one fell 2 points to 50 cents on the dollar.

The situation isn't clear -- people need further information to decide what to do, says Adel Nasr, United Securities brokerage manager in Muscat.

London-listed Standard Chartered, HSBC, Lloyds and RBS and local banks Emirates NBD and Abu Dhabi Commercial Bank are on the creditor panel.

Dubai borrowed heavily to transform itself from a backwater into the business hub of the world's top oil-exporting region. But a boom that saw it launch projects such as the world's tallest building ended when the financial crisis hit the Gulf Arab region last year.

Many investors had lent Dubai money on the implicit understanding that it was backed by the federal government of the oil-exporting United Arab Emirates, of which it is a part, so news of Dubai World's troubles has shaken confidence.

Dubai's debt rescheduling plans could go beyond the recently announced Dubai World standstill, extending to about $47 billion on the back of further restructuring needs of government-related entities, Morgan Stanley said in note on Tuesday.

Saleh said on Monday that Dubai's government and Dubai World were not the same, suggesting the emirate's most valuable firms, such as Emirates airline or its 21 percent London Stock Exchange stake would not be involved in a firesale.

(Additional reporting by Inal Ersan, John Irish, Enjy Kiwan, Jason Benham, Matt Smith, Rachna Uppal; Writing by Thomas Atkins, writing by Andrew Callus; Editing by Lin Noueihed)

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