DUBAI (Reuters) - Abu Dhabi-based Aabar Investments (AABAR.AD) wants to acquire 70 percent of Arabtec (ARTC.DU) through convertible bonds, Aabar said, in a $1.7 billion deal which would provide both cash and potential new contracts for the Dubai builder.

Aabar's board has resolved to make an offer to Arabtec to acquire 70 percent of the share capital of Arabtec by way of a mandatory convertible bond to be issued by Arabtec Holding to Aabar Investments at a conversion price of 2.3 dirhams ($0.626) per share, Aabar said in a statement on its website.

The proposed price is a 20.4 percent discount to Arabtec's closing price of 2.89 dirhams on Thursday, when the construction company and Aabar Investments surged 6.3 percent and 5.2 percent respectively ahead of board meetings, adding to earlier gains.

Credit Suisse, which has a target price of 3.33 dirhams for shares of Arabtec, said in a note that Aabar would give a welcome cash injection to Arabtec through the deal, and could help provide new contracts for it in Abu Dhabi.

Aabar, the non-energy investment arm of Abu Dhabi sovereign wealth fund IPIC, is German carmaker Daimler's (DAIGn.DE) largest shareholder.

Arabtec gets a cash injection of 6.4 billion dirhams ($1.74 billion) which hedges the company against any shortfall in working capital resulting from potential default on payments from Dubai clients, analyst Ahmed Badr said in the note.

This would also allow the company to easily secure bonding from banks for new projects.

Through its ties to the Abu Dhabi government, we believe (Aabar) can potentially give Arabtec access to a considerable pipeline of projects in Abu Dhabi, thus securing backlog growth, Badr said.

There had been market rumors since late December regarding a possible investment by Aabar in Arabtec but both firms had denied there had been any deal.

Arabtec -- which has ventured into new markets such as Russia, Qatar and Saudi Arabia as the global downturn hit business at home in Dubai -- has said it will turn its main focus to other locations including Abu Dhabi where it won contracts last year.

The real estate and construction focus in the United Arab Emirates has been shifting to Abu Dhabi from Dubai and the latter emirate's debt crisis may intensify the move.

The crisis, sparked by Dubai's November 25 request to delay repayment on $26 billion in debt for six months, is expected to delay the recovery for the UAE's real estate sector.

In mid-December Abu Dhabi lent Dubai $10 billion to meet debt obligations and stave off a bond default by state-linked developer Nakheel.

(Reporting by Firouz Sedarat; additional reporting by Stanley Carvalho in Abu Dhabi)

($1=3.673 UAE dirhams)