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Equity and currency markets were gripped by uncertainty today as investors tried to come to terms with the threat of a debt default by Dubai World, one of Dubai's leading firms.

The country stunned financial markets late yesterday when it announced that Dubai World and its subsidiary Nakheel were seeking a debt standstill ahead of a restructuring.

In a statement, the Dubai government said: "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010."

The move by the country sparked a sharp downgrade in the debt of several Dubai-related entities to junk status, with ratings agency S&P saying that the proposed restructuring could be considered a default.

The restructuring "may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity," the agency said.

Credit default swaps, essentially insurance against a debt default, soared on the news not only for Dubai but for other countries seen potentially at risk of a default.

Dubai World, which is run by the state, has $59bn of liabilities, its subsidiary Nakheel said in August, but the immediate concern is a $3.5bn bond taken out by Nakheel and maturing on 14 December.

Traders expressed dismay at the timing of the announcement. It coincides with the Eid festival holiday that starts today and that will close most firms and government offices in Dubai and the Gulf for at least four days. US markets are also shut for Thanksgiving today.

Dubai has been in dire financial straits for some months, but there had been hope it had passed through the worst. Gulf state Abu Dhabi has stepped in recently to bail out the country and analysts expect it to be helped out again by its neighbour but with severe restrictions on its development plans.

DP World, the profitable ports subsidiary is not included in the restructuring process, the Dubai government said in a separate statement this morning.