Global stock markets plunged last week as investors feared a dangerous new phase in the economic crisis after Dubai asked to suspend debt repayments.

The Dubai government’s investment vehicle, Dubai World, sought late on Wednesday to shelve its obligations for six months. It had $59 billion (£36 billion) of liabilities at the end of August, most of Dubai’s total debt of $80 billion.

The news sent markets into a tailspin, with Britain’s biggest stocks suffering their heaviest one-day fall since March.

Here, we look at the key questions:

What has happened?

The crisis started when Dubai asked to delay payment on debt issued by Dubai World and its main property subsidiary, Nakheel, the developer of three palm tree-shaped islands that once lured the super-rich.

Many companies and high-profile projects are dependent on Dubai for funding and the problems raised fears that the world’s economic recovery could be thrown off course.

International banks’ liabilities related to Dubai World could be as high as $12 billion in loans, according to banking sources. The three foreign banks with the biggest exposure to the United Arab Emirates are British — Standard Chartered, HSBC and Barclays — according to the Emirates Banks Association.

What was the immediate impact?

Although the scale of Dubai’s debts is a far cry from the $2.8 trillion in writedowns that the International Monetary Fund estimates US and European lenders will have made between 2007 and 2010, the uncertainty spooked stock markets from Tokyo to London.

More than £40 billion was wiped from the FTSE 100 on Thursday, with the index plunging 171 points, or 3.2%, to 5,194. Standard Chartered, thought to have invested more than any other UK bank in the Middle East, dropped almost 6%, while HSBC lost 5%.

“This is an important reminder that the credit crisis is forgotten but not gone,” said Robert Rennie, strategist at Westpac Global Markets Group.

The FTSE 100 stabilised to close the week down five points at 5,246.

What is the outlook?

Most commentators expect Abu Dhabi, the neighbouring emirate that has in the past given rescue loans to Dubai, to step in. Stephen Pope, chief global equity strategist at Cantor, the spread-betting company, said: “This will be contained. There is no doubt that Abu Dhabi will assist Dubai, but the upstart, glamorous emirate will have to dance to the oil-rich emirate’s tune.”

That said, Adrian Lowcock at Bestinvest, the broker, expects stock markets in the Middle East to fall by more than the 3% experienced by big western markets when they reopen tomorrow after Eid, the Muslim holiday that marks the end of Ramadan.

Darius McDermott at Chelsea Financial Services, another broker, warned of “increased volatility” and a “prolonged sell-off” in Middle Eastern stocks.

Meanwhile, Capital Economics, the consultancy, forecast a “pause in the rally in riskier assets, notably commodities, over the next few months”. Julian Jessop, its chief economist, said: “This rally is looking tired anyway and year-end effects are kicking in, with profit-taking even more likely than usual after recent spectacular gains.”

However, he believed the crisis would not affect the “positive outlook” for emerging markets in the longer-term. “We do not believe the events in Dubai mark a new phase in the global crisis, but if they’re the catalyst for a more selective approach to investment, that might be no bad thing,” he said.

What should I do?

McDermott urged investors to have only 1% to 3% of exposure to Middle Eastern and North Africa (Mena) funds.

“These are extremely high risk, so if you have more than 3% of exposure to the region you should consider reducing your holdings,” he said.

Lowcock warned, though, against knee-jerk reactions. “If you request to sell Mena funds ahead of the markets re-opening, you will only lock in the falls when they do open. Investors should wait this one out,” he said.

Meanwhile, those investing closer to home could view the falls as an opportunity, added McDermott. “The UK and other major markets appear to have absorbed the shock — so the falls should be seen as a buying opportunity,” he said.

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