Asia stocks slumped on Friday as shockwaves from Dubai's debt crisis hit the region, shaking banking shares and boosting the yen to a fresh 14-year high against a struggling dollar as investors unwound risky trades.

European shares were expected to open as much as 1.5 percent lower, extending the previous session's sharp sell-off after Dubai said two companies planned to delay repayment on billions of dollars of debt as a first step towarded restructuring.

U.S. stock futures fell 3.5 percent, signaling a rough day for Wall Street, which was closed on Thursday for the U.S. Thanksgiving holiday.

The shock Dubai news raised investor fears of debt defaults that could hit the global economy just as it is trying to recover from the financial crisis.

The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> dropped 4 percent, while the Thomson Reuters index of regional shares <.TRXFLDAXPU> fell 0.63 percent.

Japan's Nikkei average <.N225> skidded 3.2 percent to a four-month closing low, coming under additional pressure from weakness in exporters as the yen climbed to its highest level in 14 years against the dollar.

With the yen's rally raising concerns the Japanese economy could slip back into recession, Japan sent its strongest signal yet that it was considering intervening to weaken the yen with the central banks asking several banks, both local and foreign, for levels at which to buy dollars.

Banking shares were among the worst hit in the region on concerns about potential exposure to the billions of dollars in Dubai debt. The MSCI index of banking shares in Asia Pacific outside Japan <.MIAPJFN00PUS> fell 4.3 percent.

HSBC <0005.HK> fell 8 percent to HK$86.60 in Hong Kong after its London-traded shares lost 4.8 percent overnight. Standard Chartered <2888.HK>, which fell 6 percent in London , dropped by around 7 percent to as low as HK$188.60, its lowest since early October.

Japan's top bank, Mitsubishi UFJ Financial Group <8306.T>, fell 2.2 percent.

South Korea, Hong Kong and Taiwan were the biggest drags on the MSCI index, as these markets are most sensitive to the global economy.

Some of the tensions can spill over into those economies which are externally dependant for funding their investment plans, said Binay Chandgothia, chief investment officer at fund manager Principal Global Investors in Hong Kong.

Dubai said on Wednesday it wanted creditors of state-owned Dubai World and its property subsidiary Nakheel, to agree to a debt standstill in a first step toward restructuring.

Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, had some $59 billion in liabilities as of August.

The announcement sparked immediate rating downgrades of several government-related entities and sent the cost of insuring against the emirate's debt soaring and bond prices tumbling.

European shares had their worst daily percentage loss in seven months on Thursday and gold climbed to a record high of $1,194.90.

Chandgothia said some of the declines in Asia falls could also reflect investors locking in profits after a strong rally, which has lifted the MSCI Asia Pacific ex-Japan index by over 60 percent this year.

Even those who came in late into the rally late have made decent money, so there would be a tendency to take risk off the table. It's probably not a bad time to lock-in gains and let things settle down before taking the next step, he said.

DEBT MARKETS

Jitters about Dubai, an influential global financial hub, also hurt credit spreads as investors shied away from riskier assets in general.

The Asia ex-Japan iTraxx investment-grade index widened to 124/129 basis points (bps), the highest since October 28, and compared with 112/114 bps on Thursday.

U.S. Treasuries advanced as buyers looked to safer assets. The benchmark 10-year note rose 24/32 in price from late U.S. trade on Wednesday to yield 3.18 percent, down about 9 basis points.

As investors unwound their riskier bets, the yen soared against the dollar to a fresh 14-year high and also traded stronger against higher-yielding currencies like the Australian dollar.

The yen's rise has raised concerns it could hurt export competitiveness, stalling the economy's nascent recovery.

Similar stories as this Dubai one are likely to continue to come out, leading risk money to pull out from assets such as commodities and stocks, said Takahiko Murai, general manager of equities at Nozomi Securities.

Though Dubai's announcement was made on Wednesday, Asian markets were slower to react that those in other regions.

Although there was talk of it before, there was uncertainty about the full impact, Andrew Sullivan, a sales trader with broker MainFirst Securities in Hong Kong, adding that initially it was seen as a debt restructuring exercise before the default fears set in.

Until the details became clear, people were not so worried about the downside. It is a delayed reaction because more information became available overnight, he said.

U.S. gold futures fell more than 2 percent to a low of $1,162.20 per ounce as the dollar bounced back against a basket of currencies from a 15-month low hit the previous day <.DXY>.

The rebound in the dollar also weighed on crude oil prices, pushing U.S. futures below $75 a barrel.

(Additional reporting by Aiko Hayashi in TOKYO; Editing by Neil Fullick & Kim Coghill)

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