Dubai's debt restructuring proposal will determine the fate of UAE equity markets as the ailing emirate seeks support from Abu Dhabi, with markets poised to rally if the deal includes guarantees, analysts said.

Dubai's index has been resurgent, gaining 12.8 percent in 12 trading days, as investors bet a restructuring deal would be more favorable to creditors than once thought, but it is down 15.2 percent since November 25, the day Dubai World said it would seek a debt standstill.

The government conglomerate is trying to restructure about $26 billion in debt, while Dubai's total debt pile is estimated at around $100 billion.

It all depends on what the restructuring entails -- if Dubai World offers a seven-year rollover and full repayment, then this is already discounted in the market, but if there's a government guarantee the market will fly, said Haissam Arabi, chief executive at Gulfmena Alternative Investments.

If the offer is as expected, then banks won't have to increase provisions and so bank stocks like Emirates NBD and the Abu Dhabi lenders should pick up.

Emirates NBD and Abu Dhabi Commercial Bank are the two domestic lenders on a Dubai World creditors committee, with both stocks on the rise after slumping to multi-year lows in late January.

Compared to other regional markets we're way behind in valuations, said Arabi. Companies such as Aramex are fundamentally as strong as their regional peers, but are trading at a big discount, so I think the market is ripe for the rally to continue.

Robert McKinnon, ASAS Capital chief investment officer, was more cautious.

I don't think there will be much of a rally, it's likely to be anticlimactic because the market has pretty much priced everything in -- there has been a good amount of news flow coming out of the negotiations, said McKinnon.

Dubai's problems have caused the emirate's index to massively underperform, rising a mere 16 percent in the past year, when the MSCI emerging markets index gained 79 percent.

Dubai has also lagged other regional markets, with the Saudi benchmark rising 52 percent in 12 months. Neighboring Abu Dhabi

is up 19 percent, with many investors treating the UAE as a single market.

The market has been running on rumor and speculation, so when something official comes out, it could trigger a rally, said Ayman el-Saheb, Darahem Financial Brokerage director of operations, adding a government guarantee would boost UAE equities further.

Even if a debt offer disappoints, stocks should be steady because it will remove some of the uncertainty over the emirate's finances.

People want a resolution so they can start doing some fundamental analysis, said Keith Edwards, head of asset management at Doha-based investment company The First Investor.

Foreign investors are likely to remain wary, with the dominant property sector continuing to struggle and a restructuring offer still not answering how Dubai will pay off its debts in the long term.

Dubai house prices are down around 60 percent from 2008 peaks and are forecast to fall another 10 percent in 2010, according to a Reuters poll.

The property sector has such a large weighting on the market and I don't see the light at the end of the tunnel for real estate -- it's going to be stagnant for quite a while, said McKinnon.

There is over-supply and a lot of burned investors. There are also other issues for investors to consider such as the lack of liquidity.

Another major drag is the ongoing merger of mortgage providers Amlak and Tamweel, McKinnon said, with the two companies' shares suspended since November 2008. Little information has emerged since, although the UAE economy minister was quoted Thursday as saying that a merger would happen soon.

The Amlak-Tamweel merger has wider implications for the market -- people have been trapped in those stocks for more than a year and foreign investors are worried that could happen again, McKinnon added.

Dubai World's offer will also boost sentiment on other regional exchanges.

Regional markets are decoupling from the rest of the world and year-to-date we're one of the best performing asset classes in the world, said Gulfmena's Arabi.

He added this would prompt some international institutions to relocate cash from other emerging markets such as China and India to the Middle East.

(Editing by Thomas Atkins and Hans Peters)

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