* Nasdaq OMX faces $81 million hit, international reversal

* Bourses to operate as two distinct markets

* Transaction expected to complete in six weeks (Recasts, adds quotes)

DUBAI, Dec 22 - Dubai Financial Market DFM.DU(DFM) bid $121 million for Nasdaq Dubai, hitting New York-based Nasdaq OMX's (NDAQ.O) pockets, as well as the idea that international investor flows matter much in the Emirates.

Nasdaq OMX will swap its 33.3 percent stake in Nasdaq Dubai for a 1 percent stake in DFM, equivalent to 40 million shares or $39 million at the end of Dec .21.

The move is a considerable reversal for Nasdaq OMX's ambitions; it acquired its one-third interest in Dubai's international bourse -- then called DIFX -- last year, but it broadens DFM's asset class offerings.

Nasdaq said it would take a pre-tax, non-cash impairment charge of $81 million, subject to confirmation by third-party valuations, according to a statement.

The merger proposal, which had been expected for months, comes at a time when Dubai is struggling to deal with a debt crisis and is restructuring government-linked companies.

Securities being listed on Nasdaq Dubai were done so on the basis that international buyers were a key source of liquidity, said a Gulf-based international banker.

But if you want an Emirates investor base, what you want is to get (a) local distribution market. Dubai Financial Markets: that's where the retail investor lies, the banker said.

Dubai set up DIFX in 2005 to encourage local companies to sell shares help foreign investors tap regional wealth.

Securities listed on Nasdaq Dubai can list in UAE dirhams, and in dollars using international protocols. On the DFM, listings are in UAE dirhams and follow local rules.

Nasdaq Dubai, whose chairman abruptly resigned on Nov. 25, has only a paltry 14 listed companies -- including flagships such as DP World DPW.DI -- compared with 65 for DFM.

The DFM should get some advantages in terms of getting new products and structures, said Samer al-Jaouni, general manager of Middle East Financial Brokerage in Dubai.


However, Borse Dubai, which is wholly owned by the government of Dubai, and which owns 80 percent of DFM and already owned a 66.6 percent stake in Nasdaq Dubai, explained the acquisition in terms of pure economics.

This acquisition was purely based on economic merit, we see an added value, Essa Kazim, chairman of Borse Dubai and the Dubai Financial Market, told Reuters.

We have a lot of cash, almost 2.7 billion dirhams ($735 million) ... so there is no worries from that end.

Kazim also said the merger would allow for dual listings and longer trading hours, increasing revenues.

Shares in DFM rose 3.76 percent on the Dubai index .DFMGI, before capping gains. The stock ended up 1.08 percent.

The company said its offer -- which has been endorsed by Borse Dubai and Nasdaq OMX Group and is subject to conditions including regulatory approval -- comprises $102 million in cash and 40 million DFM shares.

The two would operate as independent markets but will combine back-office operations and share technology.

DFM said it would restructure itself in the near future into a holding company, to meet the guidelines of the two regulatory agencies -- Dubai Financial Services Authority and the UAE's Securities and Commodities Authority.

Dubai's flagship conglomerate, Dubai World [DBWLD.UL] is in talks with creditors to obtain a standstill agreement on restructuring some $22 billion in debt.

Borse Dubai, which is wholly owned by the government of Dubai and holds a 21-percent stake in the London Stock Exchange Group (LSE.L), itself has a $2.5 billion loan maturing in February 2010.

For a Breakingviews article on the merger, click on [ID:nLDE5BL0O9] ($1=3.673 UAE Dirham) (Additional reporting by Alex Chambers, Writing by Alex Chambers and Amran Abocar; Editing by David Cowell and Rupert Winchester)