DUBAI - DUBAI'S move to suspend payments due on a slice of government-backed debt has sent bonds in major construction company Nakheel plunging and triggered fears of a domino effect across indebted state-run corporates.

The announcement has come as a shock on world financial markets, and has begun to undermine some stock prices, in France for example.

The once rapidly booming city-state, which has fallen a long way after being hit hard by the global financial crisis, said on Wednesday it intended to ask the creditors of its largest and most-indebted company - Dubai World conglomerate which owns Nakheel, to 'standstill' debt maturity for at least six months.

'Dubai World intends to ask all providers of financing to Dubai World and Nakheel to a 'standstill' and extend maturities until at least 30 May 2010,' said a statement issued by the Dubai Financial Support Fund (DFSF).

Giant property developer Nakheel, part of Dubai World and until recently the jewel in the crown of Dubai's construction boom, was due to pay off about US$3.5 billion (S$4.8 billion) in maturing Islamic bonds in December.

The announcement was made after the closing of Dubai's stock market for a long Eid holiday, but the value of Nakheel's 2009 bonds dropped by 27 per cent, according to EFG-Hermes regional investment bank.

Dubai's total debt reached $80 billion last year, of which government companies owed some $70 billion. Dubai World alone reportedly owes $59 billion in liabilities.