Shares in London tumbled as the market opened this morning, after steep losses in Asia, as investor panic over banks' exposure to Dubai's growing financial problems gathered pace.

The FTSE 100 index of leading UK shares fell by 83.46 points to 5,110.67 in early trading, adding to yesterday's loss of 170.68 points. The FTSE bounced back, to fall by 12 points to 5,182.13 after more than an hour of trading but all eyes will be on American shares when Wall Street opens later today after being shut for Thanksgiving yesterday.

Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo, said: “I think we won’t know the full impact of Dubai until Monday after we see what happens in New York, where bank shares are likely to be hit pretty hard.”

In Frankfurt, the Dax index fell 1.32 per cent to 5,540.34 while in France, the CAC lost 1 per cent to 3,639.66.

Banks, which yesterday saw £14 billion wiped off their market value, again featured heavily among today's losers amid concern that they may have to write off even more bad debt on investments in Dubai.

Credit Suisse, the investment bank, said yesterday that European banks are exposed to half of Dubai's $80 billion debt pile, with Barclays and Royal Bank of Scotland (RBS), which is 70 per cent owned by the taxpayer, believed to have invested heavily in the region. Barclays' shares fell 3.13 per cent to 280.94p today, Standard Chartered lost 4.23 per cent at £14.50 and HSBC fell by 3.64 to 679.9p.

Despite fears of exposure, RBS shares rose by 5.53 per cent today to 34.8p after it announced it had signed an agreement to enter the Government's Asset Protection Scheme.

The Emirate this week sent investors into a tailspin when the government revealed that it planned to ask creditors of Dubai World, the state-owned conglomerate, for a six-month standstill on its debt repayments. Dubai has $80 billion worth of debt, with the vast majority held by Dubai World, which owns Nakheel, the property developer.

Nakheel, which built the Palm Islands in the Gulf, was due to repay a $4 billion Islamic bond on December 14. Most investors had assumed that there would be no difficulty doing so as Dubai World, the Government of Dubai and Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s billionaire ruler, were assumed to be supporting the developer. It now appears that nobody has the money to repay or refinance the bond and so the other $56 billion of Dubai World’s liabilities are also at risk.

Last night, Sheikh Ahmed bin Saeed Al-Maktoum, chairman of the Supreme Fiscal Committee, said that the Government's intervention into Dubai World was "carefully planned".

He said: "The Government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. We understand the concerns of the market and the creditors in particular. However, we have had to intervene because of the need to take decisive action to address its particular debt burden.

"Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn. No market is immune from economic issues. This is a sensible business decision."

Sheikh Mohammed added: "The economic fundamentals, such as our highly developed infrastructure, strong transport and communications hub and regional financial centre will ensure Dubai remains an attractive regional market."

Despite Dubai's attempt to calm markets, panic spread to Asia in what Tokyo traders described as “Financial Crisis Part II”.

Banking shares across the region led deep declines on all the major bourses as analysts rushed to calculate the likely exposure of major houses such as HSBC and Tokyo Mitsubishi to the spiralling troubles at Dubai World.

Tokyo shares, which were also battered by the resurgent strength of the yen, tumbled 3.2 per cent, losing 301.72 points, to a four month low of 9,081.52, 3. In Hong Kong, where HSBC and Standard Chartered dominate the stock index and fell by 6.6 per cent and 6 per cent respectively, the Hang Seng plummeted 4.9 per cent. There were similar losses in the main indexes of South Korea and for mainland Chinese stocks listed in Hong Kong.

Daniel Tabbush, a banks analyst at CLSA Securities, said that the crisis would have a “meaningful impact” on the Asian banking sector. He identified the Singaporean banking group, DBS, as among the most exposed, but a national holiday kept the Singapore stock market closed and prevented an “inevitable” sell-off.

Brokers at Nomura Securities said that while the worries over specific exposure to Dubai World were severe, the wider concern was greater still: “The question everyone was asking today was “what falls next?” — we are just back in one of those phases where investors are going to see downside risk in every situation.”

The sell-off was further stoked by commentary from several prominent market analysts who said that the Dubai situation highlighted the continuing fragility of markets, despite the recent appearance of recovery.

"This an important reminder that the credit crisis is forgotten but not gone," wrote Robert Rennie, a strategist at Westpac Global Markets Group.

The fear of contagion has also grown. Credit default swap spreads on Abu Dhabi government bonds rocketed on worries that other expansive Gulf states may be on the brink of similar problems.

Tokyo dealing floors took a particularly dim view of the unfolding Dubai crisis: the Japanese market is already being bludgeoned by the runaway strength of the yen, which has hit the competitiveness of exporters. The problems at Dubai, said traders, had clearly caught Japanese businesses completely off guard. An official at one of Japan’s biggest banks described the crisis as arriving “out of the blue”.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Toyota recalls 437,000 cars including Lexus
• Myners says bonuses are bleeding pension funds
• Japanese company faked safety reports on seats