Dubai's request for a debt standstill for one of its largest state-owned conglomerates has raised the possibility of the largest Islamic bond default on record, rattling the global Islamic debt markets.

Nakheel, the Dubai developer behind many of the emirate's gaudiest projects, has to find $4bn to repay an Islamic bond, known as sukuk, by December 14.

The Nakheel sukuk has been seen as an important indicator of how Dubai will manage the liabilities of its multifarious government-related entities, but a failure to repay the bond fully and on time could impact the global sukuk market, estimated at over $100bn.

"There is a lot of shock and a little bit of anger," said Nish popat at ING Investment Management in Dubai. "This is a major blow to the sukuk market. If it defaults, it would be the third one in the Gulf, and the largest Islamic bond default ever, and we're still waiting to see how sukuk-holders are treated in situations like this. There aren't any precedents."

The sukuk market has already been rocked by its first big defaults this year, which many say will represent test cases for how debt-holders are treated in the case of restructuring or bankruptcy. Sukuk are based on Islamic law, or sharia, which bans interest and requires a tangible asset to underlie financial transactions. They are structured so that investors typically receive income from a rent-generating asset, which is technically transferred to a thirdp-arty vehicle owned by the sukuk-holders for the duration of the bond. Nakheel's Islamic bond, issued in 2006, is backed by land in Dubai.

Experts say that in most cases investors do not have legal recourse to the underlying asset. However, until a sukuk default is satisfactorily settled, uncertainty will cloud the market. An investor in the Nakheel sukuk said: "This is mostly a Dubai issue, not a sukuk issue . . (but) a default would obviously be negative for the sukuk market."

By Robin Wigglesworth in London

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