Most markets in the Gulf continued to decline on Monday because of the conflict in Iraq, while volatile Dubai led losses as construction firm Arabtec remained in freefall.

Apart from a handful of firms with major exposure to Iraq, it is not clear that the conflict will have any direct impact on Gulf economies. But coupled with the deepening conflict in Ukraine, it has hurt global equity markets as some investors start shifting into other asset classes such as precious metals and bonds. Sitting on sizeable year-to-date gains, Gulf markets are vulnerable to profit-taking.

The negative sentiment stifled a tentative rally by Arabtec, Dubai's most heavily traded stock, which has plunged in recent days on worries that major shareholder Aabar may be downgrading its relationship with the firm. Aabar has declined to comment, but cut its stake in Arabtec last week.

On Monday, the stock edged up 1.1 percent after the opening, but then resumed its plunge and once again closed down its 10 percent daily limit. It ended at 4.05 dirhams, down 48 percent from May's peak of 7.74 dirhams.

In late trade, Arabtec's chief executive Hasan Ismaik told Al Arabiya television that recent rumours of a conflict between the managements of Aabar and Arabtec were untrue, and that the stock's plunge did not reflect its fair value.

"I think it's just the sentiment that is driving Arabtec down today," said Hettish Karmani, senior manager of research at Global Investment House in Kuwait.

"People are mostly concerned with Iraq now, which is driving all the Mena markets down and has raised the oil price to its nine-month high."

Dubai's index was the biggest loser in the Gulf, dropping 3.1 percent to 4,469 points and breaking through support on the May low of 4,544 points.

The emirate's stock market had earlier outperformed the region with year-to-date gains of 60 percent in early May, making it very volatile.

"Dubai's market at present is purely at the mercy of retail investors and speculators," said Shakeel Sarwar, head of asset management at Securities & Investment Co in Bahrain. "The 4,200 level, it seems, has become a self-fulfilling prophecy."

The measuring objective of a symmetrical triangle formed by the highs and lows since mid-May, and triggered earlier this month, is roughly 4,200 points.

DANA GAS DROPS

Other markets in the Gulf also pulled back, but at a slower pace. Abu Dhabi's bourse fell 1.0 percent as heavyweight Etisalat slid 1.3 percent.

Shares in Dana Gas, which has operations in Iraq's Kurdistan region, tumbled 8.9 percent to a six-month low of 0.72 dirhams. The company told Reuters on Sunday those operations were operating normally.

Mobile communications operator Ooredoo, which has obtained a fifth of its total revenue from Iraq, fell 0.6 percent, although it outperformed Qatar's bourse, which was down 1.7 percent.

Zain Kuwait, another major Gulf telecommunications firm with operations in Iraq, was down 1.5 percent while Kuwait's index fell 0.5 percent. Zain's Iraqi unit accounted for 41 percent of its total 2013 revenue.

Saudi Arabia's bourse fell 2.0 percent, its biggest drop in more than two months, as most index components declined. The petrochemical sector, which could benefit from higher oil prices due to the Iraq crisis, did slightly better, sliding 1.5 percent.

MONDAY'S HIGHLIGHTS

DUBAI: The index fell 3.1 percent to 4,469 points.
ABU DHABI: The index slid 1.0 percent to 4,783 points.
QATAR: The index pulled back 1.7 percent to 12,563 points.
EGYPT: The index fell 1.5 percent to 8,522 points.
SAUDI ARABIA: The index retreated 2.0 percent to 9,523 points.
KUWAIT: The index lost 0.5 percent to 7,109 points.
BAHRAIN: The index slipped 0.5 percent to 1,450 points.
OMAN: The index edged up 0.3 percent to 6,915 points.  - Reuters