DUBAI - Dubai's Emaar Properties EMAR.DU on Wednesday said it would not merge with Dubai Holding's property units, a move analysts said protected the developer from Dubai Holdings' vulnerable debt position.

Dubai Holding, owned by the ruler of the Gulf emirate, and Emmar, the Arab world's largest listed developer, said in June they were in talks to merge four local real-estate companies.

The board of Emaar Properties said that studies showed the lack of economic feasibility of the merger project, according to a statement sent from the ruler's office.

A shock announcement by Dubai on November 25 that it sought a repayment freeze on $26 billion worth of debt at Dubai World, which along with Emaar had spearheaded the emirate's six-year property boom, has battered investor sentiment.

Fears that Dubai's debt problems are not limited to the conglomerate again hit investor confidence in the world's top oil-exporting region and sent Gulf shares tumbling on Wednesday.

This (merger) is excellent news, it removes any dilution concerns and doubt about the company's (Emaar) ability to say no and retain its independence, said Roy Cherry, SHUAA Capital vice-president for research.

We know a lot more about Emaar than the other three companies and one of the big fears in the market was that Emaar would be exposed to increased default risk and that it wouldn't be able to objectively assess the deal, said Roy Cherry, SHUAA Capital vice-president for research.

Emaar is 31.2 percent owned by Dubai's government.

The developer, which will open the world's tallest tower on January 4 in Dubai, still derives the bulk of its revenues from the emirate, but has been badly affected as the economic crisis brought Dubai's real estate boom to a screeching halt.

DUBAI HOLDING FEARS

The news makes sense in the current environment. Emaar needs to focus more on its international operations rather than Dubai. If they merged with these companies they would have increased their land bank in Dubai, which is not feasible to do, Ahmed Badr, analyst at Credit Suisse.

Emaar's managing director said in October its planned merger with Dubai Properties, Sama Dubai, and leisure developer Tatweer would take a reasonable time as regulators look into the deal.

The resulting entity from the proposed merger would have combined assets worth 194 billion dirhams, with debt obligations of 13.4 billion dirhams, Emaar said at the time.

Emaar Investors and shareholders had been eagerly waiting for news on the merger, which could have diluted their holdings, but would have been one of the biggest in the Middle East.

They are signaling that Dubai Holding has more problems ahead than it thought, said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh. Clearly it is in a very difficult position. Dubai Holding is unfolding as the next problematic entity within Dubai Inc.

A unit of Dubai Holding, which belongs to the emirate's ruler, on Wednesday sold its stake in Egyptian investment bank EFG Hermes (HRHO.CA).

Emaar's shares have fallen 38 percent since Dubai World's standstill request.

Credit ratings agency Moody's downgraded six Dubai-linked issuers on Tuesday, including Emaar, after concluding that no meaningful government support would be provided for the emirate's top firms.

Issam Galadari, Emaar Dubai chief executive declined to comment, while executives at Dubai Holding were not immediately available.

(Additional reporting by Tamara Walid, Firouz Sedarat, Rachna Uppal and Amena Bakr; editing by Martin Dokoupil and Simon Jessop)

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