Middle East stock markets slumped to multi-year lows on Tuesday as speculation intensified that a five-year Gulf property boom was over and that developers would be forced to merge as financing conditions deteriorated.

Ambitious Gulf developers have unveiled $100 billion in new projects in the past two days, but investors were focusing instead on Europe's spreading banking crisis and falling global markets.

Shares in Saudi Arabia, the biggest Arab equity market, fell 8.7 percent to their lowest level since the index was reformulated in 2007, while Egypt's main index fell 16 percent to erase all gains since mid-2006.

'It's way beyond logical,' said equity strategist Ahmad Shahin at investment bank Shuaa Capital. 'We've reached a stage where we are just sitting down and watching and hoping that people realise that our markets are extremely well valued.'    
The Saudi Arabian Monetary Agency (Sama), the kingdom's central bank, admitted that it faced problems supplying liquidity to banks while managing rampant inflation at the same time.

'People are worried about the potential repercussions,' said Fadi Alajaji, economist at Sama. 'We are greatly affected by the changes affecting the global economy. This raises fears among investors.'    

In the energy exporting Gulf, the source of investment for much of the Middle East, rumours intensified that the government would force Dubai developers Deyaar and Union Properties to merge as financing conditions worsened.

Investors ignored company statements that downplayed the tie-up talk and focused instead on the need for builders in general to bulk up in the face of a looming downturn.

'The reasoning behind the mergers we're seeing these days is because the economic circumstances and obstacles that companies are facing these days are increasing,' Chahir Hosni, sales manager at investment bank EFG-Hermes.

Mortgage lenders Tamweel and Amlak Finance fuelled speculation that banks, builders and finance firms in the Gulf would join forces after they revealed on Saturday that they were in talks over a $2.4 billion merger.

'This is a way of raising funds, basically. This is why you are seeing companies selling out, because the bigger the entities are, the stronger they will be,' Hosni said.

Middle Eastern markets were briefly spared from the widening financial crisis due to the heavy influx of petrodollars, but faith in the financial system has weakened dramatically due to concerns about exposure to the property sector.

Gulf builders, above all, have revelled in the superlatives surrounding their construction plans, such as the world's tallest building, largest shopping mall, biggest airport or most extensive man-made island.

But as speculative cash has left the real estate market, particularly from the financial centre Dubai in the United Arab Emirates, the property boom has run out of steam.

Investors have also been discouraged by the murky nature of many enterprises in the Middle East, where transparency standards lag the West's, and investors are often left guessing about risks.

'We need more transparency of what's going on in the market, in the financial sector specifically, and we need more clarity in the real estate and banking sectors,' said Sherif Abdelkhalek, institutions accounts manager at Beltone Financial.

A fall in profit from Saudi's Riyad Bank sent the firm's shares down 10 percent, and bank Samba also fell 10 percent to levels not seen since late 2004. - Reuters