Shares hit by Dubai debt problems
Dubai World has fuelled the emirate's rapid economic growth of recent years
European shares have been hit by concerns over Dubai's financial health, after a government-owned company asked for an extension on repaying its debts.
UK, French and German markets all fell by about 3% after Dubai World asked creditors to postpone upcoming repayments until May next year.
Banks were hit particularly hard on concerns over Dubai's ability to pay back its debts.
The emirate has been badly affected by the global recession.
"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock on effect," said David Buik at BGC Partners.
The UK's FTSE 100 index fell 2.9%, with shares in Royal Bank of Scotland falling 7.8% and those in Barclays down 6.4%.
France's CAC 40 index lost 3.1% while Germany's Dax slipped 2.8%.
ANALYSIS
Ben Thompson, business reporter, Dubai
Financial markets and businesses are closed here for the Eid holiday - some suggest that's why the announcement was made when it was.
It's sparked real shock that things have come to this. Just 12 months ago, few could have believed the city would find itself asking for this lifeline. It seems Dubai is now paying the price for living on borrowed money.
Of course, everyone knew the boom couldn't last forever, but no-one expected it to collapse when, or as suddenly, as it did. Property prices have more than halved over the past year and investors have fled.
The official figure for Dubai's debt is $80bn, but talk to anyone here and the feeling is the figure is much higher. Unpaid bills, abandoned cars and empty buildings are all too obvious. Some analysts put the real figure at close to $160bn.
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Heavy price
After six years of rapid growth, the reputation of Dubai's economy is now being questioned.
"Dubai could not undermine itself any further as a place not to do business in at the moment," said Manus Cranny at MF Global.
"It is the much longer term implications on funding, confidence and capital raising that will take a decade or more to re-establish," he added.
Analysts say the Dubai government has paid the price for a flamboyant economic model centred on foreign capital and giant construction projects.
'Government failure'
Dubai World, which has total debts of $59bn (£35bn), has asked for a six-month extension on debt repayments.
It was due to repay $3.5bn next month.
The Dubai government said the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.
The request led to major credit ratings agencies downgrading a number of state-backed companies.
"In our view, such a restructuring may be considered a default under our default criteria, and represents a failure of the Dubai government to provide timely financial support to a core government-related activity," said Standard & Poor's.
Dubai is one of the seven self-governing emirates that make up the United Arab Emirates.
Some have speculated it is likely to turn to the more economically conservative Abu Dhabi emirate to bail it out.