Asian stocks slumped on Friday as the Dubai-debt shockwaves hit the region, shaking banking shares and pushing the yen to a fresh 14-year high against a struggling dollar as investors unwound risky trades.

The shock Dubai news raised investor fears of debt defaults that could hit other parts of the global economy just as it is trying to recovery from the global financial crisis.

Japan's Nikkei average took its cue from a sharp fall in Europe to hit a four-month low, coming under additional pressure from weakness in exporters as the dollar fell against the yen.

The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> dropped 2.5 percent, while the Thomson Reuters index of regional shares <.TRXFLDAXPU> fell 0.63 percent.

Banking shares led the falls on concerns about exposure to the billions of dollars in Dubai debt. The MSCI index of banking shares in Asia Pacific outside Japan <.MIAPJFN00PUS> shed nearly 3 percent.

Some of the tensions can spill over into those economies which are externally dependant for funding their investment plans, said Binay Chandgothia, chief investment officer at Principal Global Investors in Hong Kong, a fund.

Dubai said on Wednesday it wanted creditors of state-owned Dubai World and its property subsidiary Nakheel, to agree to a debt standstill in a first step toward restructuring.

Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, had some $59 billion in liabilities as of August.

The Dubai announcement sparked immediate rating downgrades of several government-related entities and sent the cost of insuring against the emirate's debt soaring and bond prices tumbling.

European shares had their worst daily percentage loss in seven months on Thursday and gold climbed to a record high of $1,194.90. The United States celebrated Thanksgiving holiday.

Chandgothia said some of the Asian falls could reflect investors locking in profit after a strong rally, which has lifted the MSCI Asia Pacific ex-Japan index by over 60 percent.

Even those who came in late into the rally late have made decent money, so there would be a tendency to take risk off the table. Probably not a bad time to lock-in gains and let things settle down before taking the next step, he said.

As investors unwound their exposure to riskier assets, the yen soared against the dollar to a fresh 14-year high and also traded stronger against higher-yielding currencies like the Australian dollar.

The yen's rise has raised concerns it could hurt export earnings and push the Japanese economy back into recession. The Japan Iron and Steel Federation has already raised concerns with the yen's elevated level against the dollar, saying it could impact the steel, auto, electronics and shipbuilding industries.

On Thursday, exporters like Honda Motor Co <7267.T> skidded, and Japan's top bank Mitsubishi UFJ Financial Group <8306.T> slipped as financial shares were hurt by concerns about their exposure to Dubai's debt.

The weighed on the Nikkei average, which fell as much as 2.2 percent to 9,180.47, its lowest level since July.

Similar stories as this Dubai one are likely to continue to come out, leading risk money to pull out from assets such as commodities and stocks, said Takahiko Murai, general manager of equities at Nozomi Securities.

Banking shares in other parts of the region also felt the brunt of the news -- HSBC <0005.HK>, whose London-traded shares lost 4.8 percent on Thursday, slumped 5.9 percent and Standard Chartered <2888.HK>, which fell 6 percent in London, skidded 5.8 percent.

Although Dubai's announcement was Wednesday, Asian markets were slower to react that those in other regions.

Although there was talk of it before, there was uncertainty about the full impact, Andrew Sullivan, a sales trader with broker MainFirst Securities in Hong Kong, adding that initially it was seen as a debt restructuring exercise before the default fears set in.

Until the details became clear, people were not so worried about the downside. It is a delayed reaction because more information became available overnight, he said.

Gold in Asia was hovering just below Thursday's record high while oil prices stood just below $76 per barrel.

(Additional reporting by Aiko Hayashi in TOKYO; Editing by Neil Fullick)