Debt problems in Dubai weighed on stocks, helped lift bonds and stirred currency trades on Thursday, as the dollar hit a 14-year low against the yen and gold climbed to a new record high.
Markets were also set to trade on the day without much input from the United States, where it was the Thanksgiving holiday.
Dubai said on Wednesday it was asking creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.
The announcement raised concern about the once-booming Gulf region's financial health and added to general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits.
Investors will now have to re-appraise the quality of sovereign support for state-owned entities in the region, Royal Bank of Scotland said in a note.
The other risk is that rating agencies re-assess their views of names in the region ... which in many cases benefit from substantial rating premiums driven by assumptions about sovereign support, which is no longer a given.
MSCI's emerging market stock index <.MSCIEF> was down more than 1 percent, underperforming the broader all-country world index <.MIWD00000PUS>, which was down 0.7 percent.
The pan-European FTSEurofirst 300 index <.FTEU3> fell 1.8 percent, led lower by banks and general weakness in Asia.
There's been a retracement in Asia overnight and the banking sector has taken a hit. There are ongoing concerns on the dollar, said Paul Webb, chief dealer at CMC Markets.
Earlier, Japan's Nikkei <.N225> closed down 0.45 percent, with exporters concerned about rising yen strength.
The dollar strengthened against a basket of major currencies <.DXY>, but only after tumbling to a 14-year low against the yen and striking a 1-1/2 year low on the Swiss franc.
The earlier falls helped gold rise to a nominal record price of $1,194.90 an ounce.
Some traders said the Dubai news had curbed risk appetite, thereby lifting the dollar back up a bit.
There was also some impact on the British pound.
There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure, said Ian Stannard for BNP Paribas.
Japan, meanwhile, indicated that it was not planning to do anything immediately about the strong yen, which was at 86.90 to the dollar.
Japanese deputy finance minister Yoshihiko Noda told Reuters recent currency moves reflected dollar weakness and Tokyo was not considering intervening now, and Finance Minister Hirohisa Fujii said the move was at the stage where they should watch.
The euro slipped 0.4 percent to $1.50725 after rising more than 1 percent on Wednesday.
Euro zone government bond prices were higher.
(Additional reporting by Jamie McGeever and Simon Falush, editing by Mike Peacock)