U.S. stock index futures pointed to a sharp drop when Wall Street reopens on Friday for half a session following Thanksgiving, as fears over Dubai's debt woes knocked stock markets around the world.

At 1019 GMT, futures for the S&P 500 were down 1.9 percent, Dow Jones futures down 2.5 percent and Nasdaq 100 futures down 2.6 percent.

Dubai, part of the oil-exporting United Arab Emirates, said on Wednesday it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt as a first step toward restructuring.

Dubai World, the conglomerate that led the emirate's expansion, had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. Nakheel was the builder of three palm-shaped islands off Dubai.

Investors continued to dump risky assets on Friday, spooked by the risk that a Dubai debt default could revive the financial turmoil of the credit crisis.

The Dubai concerns are an issue but not a real shock. It's more a question of timing with the lack of market participants due to Thanksgiving holiday yesterday and the Muslim Eid holiday today exaggerating the moves, Mic Mills, senior trader at ETX Capital, in London.

Japan's Nikkei closed down 3.2 percent, while European shares were down 0.2 percent in morning trade, adding to a 3.3 percent drop in the previous session as concerns about debt problems in Dubai continued to dent appetite for risky assets.

Crude oil prices dropped nearly $4 to $74.37 a barrel as the dollar rose, boosted by investors' run to safer assets.

The market has overreacted. The risk of Dubai defaulting has been on credit investors' radar screens for a while, and I wouldn't be surprised to see oil-rich Abu Dhabi or the Gulf's big sovereign funds coming to the rescue, said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.

This might turn out to be the year's last buying opportunity. We've been doing Christmas shopping all morning here, he said.

Investors will also keep a close eye on early indications on Friday's retail sales, or Black Friday, the traditional start of the U.S. holiday shopping season.

U.S. stocks rose in light trading volume on Wednesday, supported by data that pointed to stabilization in the labor and housing markets, areas that have fed concerns about a double dip recession.

The Dow Jones industrial average <.DJI> gained 30.69 points, or 0.29 percent, to end at 10,464.40. The Standard & Poor's 500 Index <.SPX> rose 4.98 points, or 0.45 percent, to 1,110.63. The Nasdaq Composite Index <.IXIC> advanced 6.87 points, or 0.32 percent, to close at 2,176.05.

(Additional reporting by Jon Hopkins in London; Editing by Mike Nesbit)

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