DUBAI - Long shadows from the global financial downturn hang over the United Arab Emirates as it marks its 38-year existence with flags and fireworks this week.

A debt crisis in Dubai has undercut investor confidence in the brash emirate's ambitions. It remains to be seen whether the UAE's oil-producing powerhouse Abu Dhabi will seize the chance to puncture the dreams of its freewheeling neighbour.

Balloons in the green, white, red and black of the UAE flag adorn myriad shopping malls for Wednesday's independence anniversary. Streets and trees are ablaze with fairy lights.

But beyond the fanfare, many in the seven emirates that united in 1971 when the British departed will be wondering what the future holds, especially for Dubai's bold attempts to build itself into a glittering financial, trade and tourism magnet.

Investors are holding their breath as Dubai restructures its biggest companies. Last week it asked creditors for a six-month freeze in repayments of debts worth more than $5 billion.

Abu Dhabi, the largest emirate by size, containing most of the UAE's oil wealth and housing its central bank, will pick and choose how to assist debt-laden Dubai, an official said.

Analysts see power in the federation shifting Abu Dhabi's way in the wake of Dubai's debt crisis.

The UAE, created 38 years ago under Abu Dhabi ruler Sheikh Zayed bin Sultan al-Nahayan, has held together despite old rivalries between some of its ruling families.

Dubai, ruled by the Al Maktoum family, developed as a trading entrepot. Since the 1990s its population has shot up to 1.7 million, swelled by professionals from around the world.
Now some doubt the boom times will return.

Dubai is the icing on the cake -- and it is melting, said London-based banker Tom Acreman, as he snapped photographs of Burj Dubai, the world's tallest skyscraper.

The tower, due to open on January 4, is being built by Emaar Properties, whose chief was removed last week from the board of one of Dubai's top holding firms as part of a shake-up in the government's three major corporate entities.

Burj Dubai stands alongside other mega projects, such as three man-made palm islands, the world's first indoor ski slope and its longest driverless train, as another symbol of Dubai's relentless ambitions -- which sometimes upset its neighbours.

The city has exploded too fast, it's difficult to know how much money, tangible assets they really have, Acreman said.

Yet Dubai and Abu Dhabi have made huge strides in developing the UAE in just a few decades, harnessing dynamism to deep pockets in a combination many other Middle East countries lack.

In the space of less than 40 years, for a country to build such huge infrastructure, have the first metro in the Gulf, create two airlines among the best in the world, and have a financial centre are quite substantial achievements, said Laurent-Patrick Gally of Shuaa Capital.

To join the Dubai dream, hundreds of thousands of foreigners flocked to the emirate, which for more than six years carved out a niche as a Middle Eastern hub for business and fun.

Exposure to international markets took its toll on Dubai when the global crisis hit in late 2008. Job cuts and project cancellations prompted thousands of expatriates to return home.
Emma Kristensen, head of the child support group Twins, Triplets or More, said she was not yet considering leaving, but she and her Danish husband were not keeping savings in Dubai.

We have moved our money overseas to Denmark, where it is safer, she said.

(Editing by Alistair Lyon and Janet McBride)