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Reporting from Beirut and New York — Stock markets sank in the U.S. and Asia on Friday as investors scrambled to determine whether a debt crisis in the Middle Eastern emirate of Dubai would infect credit markets around the globe.
The Dow Jones industrial average fell almost 155 points after Dubai, part of the United Arab Emirates, sought late Wednesday to suspend payments on $60 billion in debt owed by its state-owned investment company.
The news sent markets outside the U.S. tumbling Thursday while Wall Street was closed for Thanksgiving. Most Asian markets fell for a second day Friday, while European and Latin American stocks recovered some of their losses recorded the day before.
Worries about bad debt are fresh in investors' minds after the collapse of the U.S. brokerage Lehman Bros. in September last year pushed the world deeper into recession overnight as banks halted lending on fear of a domino effect of bad loans.
In addition to fear that the mounting woes of the company Dubai World could spread to global credit or commercial real estate markets, there was uncertainty about the potential exposure of international banks that had been grappling with losses tied to last year's financial crisis.
The Dow opened down more than 230 points before rebounding somewhat, in part because U.S. banks appeared to have limited exposure to Dubai. After a session that finished three hours early because of the holiday weekend, the blue-chip gauge closed at 10,309.92, down 154.48 points, or 1.5%.
"People will sell this market with reckless abandon if they sense there's a likelihood of contagion, but that's not the case right now," said Peter Kenny, a trader at Knight Capital Group Inc. in Jersey City, N.J. "This appears to be a relatively isolated incident."
Some analysts said the global market response -- including two-day losses of 6.5% in Hong Kong, 5.4% in South Korea, 3.8% in Japan and 3.9% in an index of emerging-market stocks -- was an overreaction.
Still, it's possible the extent of the fallout from the Dubai surprise won't become clear until next week.
The battered dollar surged Thursday and Friday on word of the crisis as investors sought the relative safety of the currency and U.S. government debt. An index of the greenback's value against other major currencies gained 1% in the last two days.
The rise in the dollar helped push down prices of commodities and the shares of commodity producers.
Oil futures fell $1.91 to $76.05 a barrel, their lowest level in five weeks, in New York trading.
Gold futures slumped $12.80 to $1,174.20 an ounce.
All 10 major industry groups in the Standard & Poor's 500 ended the day in the red. Financial stocks lost 2.74% on average, more than any sector, followed by raw-material producers and energy firms, which both fell 2.4%.
Despite having little oil, Dubai has sought to mold itself into a center of trading and finance. It embarked on a dramatic building spree in recent years financed largely with debt and is considered to have a severe overhang of commercial real estate.
Many investors had assumed that the neighboring emirate of Abu Dhabi would make good on Dubai's debt, but the proposal Wednesday of a debt freeze threw that thinking into question.
Investors were calmed somewhat by analyst comments that major U.S. banks had little exposure.
"The lesson learned in the 1970s and 1980s was that investing overseas was a perilous pursuit for American financial institutions," analyst Richard Bove of Rochdale Securities wrote in a note to clients. "Therefore, universally they wrote down their exposures in developing nations and got out."
Shares of Citigroup closed down 2.6% after initially falling as much as 5.3%. JPMorgan Chase dropped 2%.
The worst-hit banks include Credit Suisse Group, HSBC Holdings, Barclays, Lloyds Banking Group and Royal Bank of Scotland, reported the National, a newspaper in Abu Dhabi.
Dubai World was created in 2006 as an umbrella conglomerate for a number of state-controlled businesses, the most visible being real estate developer Nakheel and port operator DP World, which became the center of a controversy in the U.S. after it acquired a company that controlled several American ports.
DP World, which eventually sold its U.S. holdings, continues to operate ports in China, Lebanon, Russia, France, Canada, Saudi Arabia, India and Britain.
The chairman of Dubai's Supreme Fiscal Committee sought to reassure investors that, despite evidence to the contrary, everything was under control.
"Our intervention in Dubai World was carefully planned and reflects its specific financial position," said Sheikh Ahmed bin Saeed Al Maktoum.
"This is a sensible business decision," said Maktoum, adding that Dubai's economic fundamentals were sound and would ensure that the city-state would remain an attractive regional market.