Investors recoiled from risky assets on Friday and dumped shares in Asian banks and builders, fearing a Dubai debt default could reignite the financial turmoil of the credit crisis.

Stocks from Tokyo to Mumbai were haunted by suspicion of lenders' exposure to Dubai firms that built islands in the Gulf, planned cities from Pakistan to Africa and fashioned the financial hub of the world's biggest oil exporting region.

This an important reminder that the credit crisis is forgotten but not gone, Robert Rennie, strategist at Westpac Global Markets Group, said in a note.

Asian banks, like their European peers, scrambled to distance themselves from Dubai, a desert emirate that emerged from dusty obscurity to invest in global lenders such as Standard Chartered and lure fund managers with the promise of a tax-free lifestyle.

Dubai, part of the oil-exporting United Arab Emirates, said on Wednesday it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt as a first step toward restructuring.

Dubai World, the conglomerate that led the emirate's expansion, had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. Nakheel was the builder of three palm-shaped islands off Dubai.

The news shook markets recovering from the collapse of the U.S. housing bubble and contagion that threatened to rupture the global financial system last year.

The panic button's been hit again, said Francis Lun, general manager of Fulbright Securities in Hong Kong.

Analysts expect financial support from Abu Dhabi, the UAE's largest emirates and producer of most of its oil. But Dubai may have to abandon an economic model that focused on developing swathes of desert with foreign money and labor.

The prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.

The biggest worry I have is whether this will trigger a repricing in the overall emerging market, said Arthur Lau, a fund manager in Hong Kong with JF Asset Management.

The nerves showed in credit markets, at the center of the financial storm triggered by the Lehman Brothers' bankruptcy last year.

Asian credit default swaps, used to insure against default, were at their widest in a month, with the Asia ex-Japan iTraxx investment-grade index touching 124/129 basis points.

Dubai's credit default swaps were being quoted as high as 500-550 basis points, some traders said on Thursday.

BANKS

Dubai's debt problems are a hangover from a property bubble that imploded after the financial crisis derailed its plans to become a magnet for tourists and a regional hub for everything from shipping to entertainment.

Banks' exposure to a Dubai default pales in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have to make between 2007 and 2010 as a result of the credit crisis.

International banks' exposure to Dubai World could be as high as $12 billion, banking sources told Thomson Reuters LPC.

It was the fear of the unknown that was driving trade.

Similar stories to the one in Dubai are likely 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 in Japan.

Japan's biggest bank Mitsubishi UFJ Financial Group fell as Japan's Nikkei average struck a four-month closing low. It also came under pressure from weak exporters after the dollar hit a fresh 14-year low against the yen. The Australian and New Zealand dollars retreated.

Oil extended Thursday's decline to tumble below $75 a barrel. Shanghai copper and Chicago grains each dropped around 2 percent.

Shares in HSBC Holdings, one of the bookrunners on an outstanding $5.5 billion Dubai World loan, dropped more than 7 percent and Standard Chartered losses topped 6 percent. The London listed shares of the two lenders led the biggest tumble in European bank stocks in six months on Thursday.

The Dubai crisis could have a meaningful impact on banks across Asia, said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok, listing Standard Chartered, HSBC and Singapore's DBS Group as the most exposed in the region.

DBS shares were not traded due to a market holiday in Singapore.

China State Construction International and ICICI Bank were among Asian firms that said they had no exposure to Dubai after their shares fell.

Builders, such as Australian construction firm Leighton Holdings, took a beating on concern that money due from Dubai's grandiose construction projects, including the world's tallest building, would not be paid.

(For graphic of a simplified breakdown of the various holdings of Dubai World, Dubai Holding and Investment Corporation of Dubai click:

http://graphics.thomsonreuters.com/119/ME_DBSTR1109.gif)

(Additional reporting by Umesh Desai in Hong Kong and Kevin Yao in Singapore)

(Writing by Dayan Candappa; Editing by Neil Fullick)