Markets gave a cold reception to the proposed merger of Dubai-based mortgage lenders Amlak Finance and Tamweel, as worries persisted about how the US financial crisis would hit Gulf lenders.

Shares in both firms fell on the first day of trading after the proposed $2.4 billion tie-up and analysts predicted more mergers to come as the global funding crisis redoubled pressure on lenders and builders in Dubai's booming real estate sector.

Financing firms such as Amlak and Tamweel face a lack of liquidity due to the credit crisis, while property developers have seen investors pushed to the sidelines. The result will mean less business and tougher conditions for lenders.

Analysts said doubts persisted about how any planned merger, first revealed at the weekend, could aid either firm to access funding affordable enough to enable it to lend at a profit.

"That will not be solved with a merger like this," said analyst Raj Madha at EFG-Hermes. "The benefits of a merger are not clear."

Shares in Amlak were down 1.2 percent and Tamweel down 3.7 percent by 0806 GMT, helping to drag Dubai's main index down 6.55 percent.

Dubai Financial Market shed 6.86 percent to close on 3,844.27 points, its lowest finish in about 18 months. So far, it has dropped 35.2 percent this year.

Abu Dhabi Securities Exchange, dived 4.7 percent to 3,769.84 points, also because of a drop in the real estate sector which shed nine percent.

In Qatar, the Doha Securities Market ended the day down seven percent at 8,664.46 points, while Oman's Muscat Securities Market fell 2.8 percent. Kuwait Stock Exchange, the second largest in the Arab world, lost 3.6 percent to close on 12,379.00 points, sliding below the 2007 close for only the second time this year.

The Gulf's energy wealth at first shielded it from the global credit crisis but an exodus of foreign capital in the past month has aggravated tight lending conditions, forcing Gulf central banks to intervene to keep the economy functioning.

Mortgage lenders have not faced the same level of regulation or control that banks have, creating some doubts about the sorts of risks they may face if conditions worsen.

"These companies will face some fundamental issues if the liquidity situation deteriorates," said Yazan Abdeen, fund manager at ING Investment Management Middle East.

"There is huge exposure to that risk that is not provisioned for or controlled, which will create a huge problem if the real estate market plunges," he said. "The high cost of leveraging will hurt financial companies like Amlak and Tamweel much more than it will hurt banks."

An Amlak-Tamweel merger would have a combined market worth of around $2.4 billion, based on pre-announcement valuations.

That would make it Dubai's biggest union since Emirates NBD, the largest Gulf Arab lender by assets, was formed last year in an $11.3 billion government-brokered merger between Emirates Bank International and National Bank of Dubai.

With or without a crisis, slower growth in the Dubai real estate sector -- which includes the world's tallest building and man-made palm-shaped islands -- could increase competition among financing firms, which in turn forces them to consolidate.

"Amlak and Tamweel certainly may be an indication of further mergers to come," Madha said. The merger may also stem partially from investigations into irregularities at Tamweel that followed a crackdown on corruption by the Dubai government, which has said it is keen to rid the fast-growing state of murky dealings. - Reuters