Dubai Debt Fears Stalk World Markets

European stock markets rebounded Friday after Wall Street didn't fall as much as feared on the news that Dubai is having trouble handling its debt.

The world's tallest tower Burj Dubai stands on Sheikh Zayed Road in Dubai February 27, 2008. The...

The world's tallest tower Burj Dubai stands on Sheikh Zayed Road in Dubai February 27, 2008. The media office of the city-state's ruler said Wednesday the hulking Burj Dubai will now debut on Jan. 4, a month later than expected. The new opening date is timed to coincide with the fourth anniversary of Sheik Mohammed bin Rashid Al Maktoum's appointment as ruler of Dubai.

(Jumana ElHeloueh /Reuters)

Because U.S. markets were closed for Thanksgiving Day on Thursday, they are only reacting now to the fears that Dubai's debt problems may affect the wider financial system.

In Europe, the FTSE 100 index of leading British shares closed up 51.60 points, or 1 percent, at 5,245.73 while Germany's DAX rose 71.44 points, or 1.3 percent, at 5,685.61. The CAC-40 in France ended 42.22 points, or 1.2 percent, higher at 3,721.45.

On Wall Street, the Dow Jones industrial average was down 137.40 points, or 1.3 percent, at 10,327 around midday New York time while the broader Standard & Poor's 500 index fell 15.64 points, or 1.4 percent, to 1,094.99. Futures markets had earlier been pricing in 2 percent plus declines on the two indexes.

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Though hefty, the losses in the U.S. paled in comparison to those posted earlier in Asia, when indexes in Hong Kong and South Korea tumbled 5 percent in response to the previous day's Dubai-related losses in Europe.

"The story for most of today has been one of continued recovery, clawing back a portion of the losses seen on Thursday...a fairly orderly opening to U.S. markets has also helped calm nerves," said Anthony Grech, market strategist at IG Index.

"So far the recovery has been an encouraging one and shows that even after eight months of strongly rising stock markets, the appetite still seems to be out there to buy into the dips," Grech added.

Confidence about the world economy was hit hard by the news that Dubai World, a government investment company with around $60 billion worth of debt, has asked creditors if it can postpone forthcoming payments until May. Investors are wondering whether the current uncertainty surrounding the emirate has brought the eight-month equities bull run to an end.

Analysts said more clarity about the long-term impact of Dubai's troubles would likely emerge next week, when Wall Street is back to normal trading hours following the Thanksgiving Day holiday. U.S. markets are only open for half the day Friday.