Shares of many major European banks tumbled yesterday as fear grips the market after the Dubai government said on Wednesday it will ask creditors of its investment arm Dubai World for a moratorium of at least six months on debt worth billions of dollars.

The government plans to restructure Dubai World in the face of global economic downturn.

At 1650 GMT (22:20 IST) yesterday, the DJ Stoxx European bank index was down 5 per cent at 218.1 points, its steepest one-day drop since mid-May.

It is estimated that a host of European banks face potential losses on an estimated $40 billion in exposure to Dubai.

Europe's biggest bank HSBC fell 4.8 per cent, Royal Bank of Scotland and ING both tumbled over 7 per cent and Lloyds Banking Group lost 6 per cent.

''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,'' said a statement issued by the Dubai Financial Support Fund (DFSF).

The government said that it had appointed consultants Deloitte to help with restructuring the conglomerate which spearheaded the emirate's unparalleled growth.

State-run Dubai World, a conglomerate spanning real estate and ports, has $59 billion of liabilities, its subsidiary and property developer Nakheel, said a few months back.

Nakheel, the developer behind the man-made palm-shaped Palm Jumeirah island and a cluster of islands taking the shape as a map of the world, was due to pay off some $3.5 billion in maturing Islamic bonds in December.

According to international ratings agency Standard and Poor's, state-related companies in Dubai are due to repay nearly $50 billion in debt within the next three years.

Analysts expect neighbouring oil-rich emirate Abu Dhabi may help keep Dubai afloat. But Dubai will likely have to abandon its economic model that focused on heavy real estate investment and inflows of foreign capital.

Meanwhile, Dubai said it has raised $5 billion in a new bonds issue aimed at helping meet its debt obligations.

The $5 billion in bonds, the second tranche of a $20 billion bond programme, were fully and equally subscribed by two Abu Dhabi government-controlled banks, National Bank of Abu Dhabi (NBAD) and Al Hilal Bank, a leading Islamic lender, the Dubai finance department said in a statement.

''The amount issued was determined by (Dubai's) current needs and obligations,'' the statement said.

The first amount of the new tranche scheduled to be drawn down is $1 billion, and will be split equally between a conventional bond issue to NBAD and a sukuk, or Islamic bond issue, to Al Hilal Bank, it said.

The subscription by Abu Dhabi banks indicates that the oil-rich emirate is prepared to help ease Dubai's financial woes, as private sector interest in lending to Dubai appears limited.

The first tranche of $10 billion was fully subscribed several months ago by the UAE central bank.

It is not clear which government entities or corporates would benefit from the new cash injection.

The Dubai government said the newly raised capital ''is not linked to the restructuring of Dubai World and is meant for the general purposes of DFSF,'' the latter said.

Standard & Poor's said it was putting four of Dubai's biggest banks on credit watch with negative implications because of their large exposure to Dubai World debt, and more generally Dubai-related credit.