DUBAI (Reuters) - Dubai will ask creditors of two of its flagship firms for a standstill on debt worth billions of dollars as a first step towards restructuring Dubai World, the conglomerate which spearheaded the emirate's breakneck growth.

The government's announcement yesterday, which said consultants Deloitte had been appointed to help with the restructuring, sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

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.

Analysts expect financial support from deep-pocketed Abu Dhabi, a neighbouring member of the United Arab Emirates, to keep Dubai afloat. But Dubai will likely have to abandon a flamboyant economic model that focused on heavy real estate investment and inflows of foreign capital.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations, and most analysts were of the view that Nakheel's commitments would be met," said Shakeel Sarwar, head of asset management at SICO Investment Bank.

"Abu Dhabi has been supportive of Dubai, but it appears this support is not enough for Dubai to meet its obligations on time."

The government said in a statement: "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010."

Nakheel, developer of iconic palm-shaped residential islands owned by Dubai World, has a $3.5 billion Islamic bond maturing on December 14 and debt worth 3.6 billion dirhams ($980 million) due on May 13, 2010. Limitless, another Dubai World developer, has a $1.2 billion bond maturing next March 31.

The announcement appeared to be timed to minimise its impact on markets; it came after the stock market shut and just before the eve of the long Eid al-Ad holiday, which will close many firms and government offices in Dubai and the Gulf until December 6.

But the cost of insuring Dubai government debt against default with five-year credit default swaps soared, jumping over 100 basis points to 420.6 from a close of 318 a day earlier. Nakheel's Islamic bond prices fell more than 20 points to 87.

"The market had expected a timely repayment of the $3.5 billion sukuk and spreads had narrowed. This will destroy a lot of confidence," said Eckhart Woertz, economics programme manager at Gulf Research Centre.

"The standstill requests comes as a surprise, especially after additional finance from Abu Dhabi has been raised."

Dubai's economy was hit hard as the global credit crunch over the past year ended a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.

In a surprise move last weekend, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, reshuffled the board of the Investment Corporation of Dubai, which manages his wealth, and changed the chief of the Dubai International Financial Centre.

The reshuffle, which removed boom-era leaders from key positions, was widely seen as a shift towards more conservative stewardship of Dubai's resources.

Dubai's announcement yesterday shook the confidence of investors in government debt elsewhere in the region; credit default swaps for Abu Dhabi, Saudi Arabia and Qatar also rose, by more modest amounts.

Investor confidence in Saudi Arabia has been hit this year by up to $22 billion of debt restructurings at the country's Saad and Algosaibi groups.