DUBAI (Reuters) - Dubai's handling of the debt crisis at flagship Dubai World will affect its ability to attract future investment, British Business Secretary Peter Mandelson said yesterday, amid a report the firm may offer creditors just 60 cents on the dollar.

Mandelson said the Gulf Arab emirate, which shocked global markets in November with plans to delay repayment on $26 billion in debt, must reach a "demonstrably fair" deal with creditors.

Dubai denied yesterday a Dow Jones report that it is mulling a two-part deal, including one that may repay lenders 60 percent over seven years.

"Dubai has to be conscious of the fact that how it resolves its current problems will mean a great deal for the Dubai brand, its reputation and how it secures investment from overseas in the future," Mandelson told a British business group meeting in the Gulf Arab emirate.

"Time is running out. The current uncertainty and the lack of agreement cannot go on for much longer."

Dubai World is in talks with banks on the debt delay — about $22 billion linked to its main propery units Nakheel and Limitless World — but has yet to present a formal proposal. It staved off default on a $4.1 billion Islamic bond linked to Nakheel, after a last minute bailout from Abu Dhabi in December.

Investors, already spooked by a lack of information on the company's plans to repay the debt, reacted with dismay to the reported proposal.

"Even though the news is not confirmed, a 40 percent haircut is potentially larger than what people were expecting, plus there's the extra sting in the tail of seven years," said Ali Khan, managing director and head of brokerage at Arqaam Capital.

"That's weighing heavily on the market."

Dubai's benchmark index slumped 4.1 percent on investor worry about such a deal. It closed down 3.5 percent.

Citing two unnamed bankers, Dow Jones said the firm may offer 60 cents on the dollar in a plan that may come with a sovereign guarantee but does not pay interest.

The second offer may see creditors get full repayment, including 40 percent of their Dubai World debt in the form of assets in Nakheel, with no government guarantee and also over seven years, according to the bankers.

"There will be two offers on the table by the end of April," according to one banker cited by Dow Jones.

The ruler's media office said it has not made any offer to Dubai World creditors and no offer would come before March or April, according to Al Arabiya television.

On Friday, Dubai debt insurance costs surged to 2-½ month highs and bond yields rose as growing uncertainty over the fate of the debt-laden conglomerate World sent investors scrambling to hedge their exposure.

The company has been negotiating with an unofficial seven-member coordinating committee of banks from the United Arab Emirates, Britain and Japan, which combined have about two thirds of total exposure to the conglomerate.