Dubai's move to sell $10 billion in bonds to the United Arab Emirates central bank alleviated worries it could default as investors bet the state might step in again to help the former boom town weather the downturn.

Dubai stocks jumped as much as eight per cent on Monday and the cost of insuring the emirate's debt fell sharply off of peaks this month that saw credit default swaps (CDS) for some Dubai-linked companies soar to levels exceeding debt of Iceland.

'The UAE is making clear it is able and willing to provide support as and when it is needed,' said Simon Williams, regional economist at HSBC.

'Dubai's economy will still slow sharply this year. Credit markets will remain tight and export markets are weak but this is a crucial step to put a floor under the near-term downturn.'

Facing a real estate slump that has led to thousands of job cuts, hundreds of billions of dollars in project cancellations and raised concerns about bank asset quality, Dubai needed quick access to funds to refinance $15-20 billion in debt this year.

But global banks have been loath to lend a hand. Stock exchange company Borse Dubai struggled last week to refinance $3.4 billion from banks, forcing the emirate to turn to a state-owned investment company for the lion's share of funding.

In a clear signal the UAE government won't leave Dubai to grapple with the crisis alone, Dubai launched a $20 billion bond programme and said it would sell at least half to the central bank of the seven-member federation that includes Abu Dhabi.

'This will eliminate uncertainty,' said Marios Maratheftis, regional head of research at Standard Chartered Bank. 'It marks a one-country approach and doesn't leave any questions about Dubai's ability to refinance its debts for 2009 and next year.

Analysts were reluctant to term the move as a bailout as the plan involved giving debt to the central bank - albeit at a subsidised rate of 4 per cent annually - rather than equity.

They were also sceptical of about how much appetite there would be on the public market for the remaining bonds given the low yields.

'Pricing in a bankruptcy

Credit and equity markets reacted positively to the news. The cost of insuring Dubai sovereign debt with CDS fell to about $750,000 per $10 million of five year debt - down from between $920,000 and $950,000 on Sunday, three bankers said.

Dubai's stock benchmark, which suffered a 72-per cent plunge last year, advanced as much as 7.5 per cent.

Bellwether Emaar Properties soared 13.2 per cent on news of the bond issue and because it said it did not expect any further significant impact on its first-quarter results stemming from the bankruptcy of its US unit John Laing Homes.

'The market was pricing in a Dubai bankruptcy which was never the case,' said Rami Sidani, head of investment for the Middle East and North Africa at Schroders Middle East.

'Dubai is getting proper support from the federation as it has a vital economic presence in the UAE. The UAE has the reserves and oil surplus to be used in a rainy day, which is what we are going through today.'

But analysts said $20 billion was not enough to meet economic challenges facing Dubai, which threw itself onto the world stage by building the world's tallest tower, islands shaped as palm fronds and the world map.

More to come?

Property prices in the Gulf trade and tourism hub have fallen at least a quarter from a 2008 peak while banks take heavy provisions for bad loans and writedown investment losses.

The UAE finance ministry and central bank had launched 120 billion dirhams of funding facilities to help banks cope.

'We probably will see more response to help the economy,' said Maratheftis, who has urged the government to inject about 110 billion dihr