A report from Swiss bank Credit Suisse has estimated that European banks have lent €13 billion to heavily-indebted Gulf state Dubai.
The report came after Dubai shocked investors by moving to suspend some repayments.
Credit Suisse analysts said investments in the Middle East accounted for up to 2% of European banks' exposure to loans in the region, of which Dubai represented just a part.
Dubai's government rattled financial markets yesterday when it said it would ask creditors of its Dubai World conglomerate for a debt moratorium of at least six months. Ratings agency Standard and Poor's described this as a default.
Read more on Dubai's dramatic reversal
State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.
Global stock markets fell sharply on the news, with European exchanges particularly hard hit. Bank shares, which had recovered over the last six months on hopes the worst of a global economic crisis was over, fell to lows not seen since May on fears of exposure to Dubai.
In common with European bank shares, the Irish banks were also lower today. See how the bank shares performed here
Shares in companies in which Gulf investors own big stakes, including the London Stock Exchange, UK grocer Sainsbury and German car makers Porsche and Daimler, also fell sharply on concerns the Gulf holdings would be cut to meet obligations at home.
Dubai has seen a surge in extravagant building projects, with vast skyscrapers springing up in the desert state, but it has suffered in the global financial crisis. Most of its debt is held by state-backed companies.
If these defaulted on half of their debt, the bill for European banks would reach €5 billion, the Credit Suisse report said, naming HSBC, BNP Paribas and Deutsche Bank among those affected. Credit Suisse said its own exposure was not substantial.
