Shares in banks, builders and companies part-owned in the Middle East fell around the world on Thursday and investors sought safety in government bonds on worries about Dubai's ability to pay its debts.

Sterling fell as exposure focused on UK banks, and euro zone government bond futures hit their highest level since late April, breaking out of the trading range that has been in place since June as risk aversion prompted by the crisis kicked in.

The Dubai story is weighing heavily on stock markets and people are looking to safe-havens so there's some flight to quality again, said Charles Berry, a trader at LBBW.

The euro broke above 91 pence for the first time in a month to hit a high of 91.29 pence.

There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure, said Ian Stannard, currency strategist at BNP Paribas.

European bank shares fell over 3 percent on concern about potential exposure. Dubai said on Wednesday that two of its key firms, Nakheel and Dubai World, plan to delay repayment on billions of dollars of debt.

Companies where Middle Eastern investors own big stakes, such as the London Stock Exchange were also hit by concern the holdings could be cut to meet obligations at home.

By 1020 GMT the DJ Stoxx European bank index <.SX7P> was down 3.5 percent at 221.7 points.

The fall was led by HSBC , Standard Chartered , Barclays , Deutsche Bank and Royal Bank of Scotland , whose shares all fell over 4 percent.

In Seoul, shares in construction issues fell, with Samsung C&T <000830.KS> leading losses as investor concerns focused on Dubai's once booming construction sector.

A Samsung C&T <000830.KS> spokesman said that the company was currently working on a $350 million project awarded by Nakheel in 2007.

So far, we have not had any problems with the project, he said.

Shares in Hyundai Engineering & Construction <000720.KS> were down 4.41 percent and Samsung Engineering <028050.KS> fell 2.16 percent as of 0458 GMT.

Nakheel's Islamic bond prices extended losses, falling 12 points to 72, their lowest since February, according to Reuters data.

DEBT DELAY

Dubai said on Wednesday that two firms planned to delay repayment of debt as a first step toward restructuring Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.

The news has sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling. State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.

This was a surprise to all bankers, and probably to the management of DW as banks had been progressing well with refinancing discussions, a senior loans banker active in the Gulf said on Thursday.

It sounds like a political decision taken right at the top which has caused Dubai immense PR damage. This is very serious and will have implications across the region, he said.

Shares in the LSE dropped as much as 8.8 percent to 742.5 pence, on worries that 22-percent-shareholder Borsa Dubai might sell down its stake.

Given that Borse Dubai, which is also state-owned, holds a big stake in the LSE, investors are obviously concerned about whether the situation in Dubai could lead to an off-loading of the holding, one London-based trader said.

German carmaker Porsche
, in which the Qatari Investment Authority holds a stake of about 10 percent, was another casualty, dropping as much as 9.9 percent.

Everything that is in Arabian hands is getting sold at the moment, said a Frankfurt-based trader.

Luxury auto peer Daimler , in which Abu Dhabi's Aabar Investments owns a 9.1 percent stake and Kuwait another 6.9 percent stake, also fell, as did British grocer J Sainsbury , in which the QIA owns about 26 percent.

The U.S. market is closed for the Thanksgiving holiday on Thursday, which could add to volatile market conditions.

A spokesman for Standard Chartered, which is based in London but operates in Asia, the Middle East and Africa, said the bank did not comment on specific clients but was aware of its disclosure requirements.

Deutsche Bank and RBS declined to comment, and HSBC and Barclays were not immediately available.

(Additional reporting by Mark Potter, Natsuko Waki and Chris Langham; Editing by Andrew Callus and