(Updates with U.S. markets, comments)
* MSCI world equity index falls 1 pct on Dubai concerns
* U.S. stocks pare losses after steep drop at open
* Dollar gains; yen loses ground after BoJ checks rates
By Al Yoon and Atul Prakash
NEW YORK/LONDON, Nov 27 (Reuters) - Dubai debt default concerns rippled through world markets for a second day on Friday, but the exodus from equities and rush to the safe-haven dollar slowed as investors discounted contagion.
U.S. stocks initially fell more than 2 percent New York, the first day of trading after Dubai on Wednesday said it would ask creditors of two flagship firms, including conglomerate Dubai World, for a standstill on debt payments as part of a restructuring. For details, see [ID:nGEE5AQ13P].
The potential magnitude of the event, measured by Dubai World's $59 billion in debt, unhinged markets on concern that the hangover from the credit-driven property boom may hold more harsh surprises for banks. U.S. and European stocks edged off lows or rose later in trading, however, signaling some investors expected the event would not derail a recovery.
"What we've seen is that once the dust settles, some of the markets that were hardest hit have rebounded," said David Katz, chief investment officer at Matrix Asset Advisors in New York. "It's a scare to the markets, but the U.S. has less exposure to Dubai than Middle Eastern and European banks."
The MSCI world equity index <.MIWD00000PUS> fell 0.8 percent after tumbling 1.3 percent to its lowest in 2-1/2 weeks, with the benchmark on track for a second consecutive weekly loss.
The MSCI since October has had trouble extending the rally that began in March as investors have raced to lock in gains ahead of year-end accounting. The index is still up about 70 percent since early March.
Dubai struggled to ease fears of debt default by saying on
Thursday its profitable DP World
The emirate is a center for investment and a major source of capital for Western markets.
U.S. indexes almost halved early losses. The Dow Jones Industrial Average <.DJI> fell 134.83 points, or 1.29 percent, to 10,329.57. The Standard & Poor's 500 Index <.SPX> slid 1.40 percent to 1,095.07 and the Nasdaq Composite Index <.IXIC> declined 1.39 percent to 2,145.84.
European shares rose. The FTSEurofirst 300 <.FTEU3> index of top European shares rose 1.55 percent to 1,003.47, after falling more than 3 percent on Thursday.
Investor appetite for risky assets bounced from a 23 percent drop on Thursday, with the VDAX-NEW volatility index <.V1XI> down 3.3 percent. The higher the index, which is based on sell and buy options on Frankfurt's top 30 stocks, the lower the market's desire to take risk.
The U.S. market volatility index <.VIX> declined 9 percent from its open, but at 23.61 remained 15 percent above its close on Wednesday. U.S. markets were closed on Thursday for the Thanksgiving Day holiday.
In currencies, the dollar rose as fears of a possible Dubai debt default sent investors into safe havens. The dollar rose against a basket of major currencies <.DXY>, up 0.15 percent at 74.938.
"A combination of systemic risk fears and thin market liquidity due to the U.S. holiday season has proven to be a combustible mix and several currencies or currency blocs are feeling the impact," UBS currency analysts wrote in a note.
"The wider fallout has simply revealed how fragile both markets and risk appetite still are," they said.
The yen hit a 14-year high against the dollar before
retreating when the Bank of Japan stepped close to currency
intervention by checking exchange rates with commercial banks.
The dollar
Commodity prices extended previous session's steep losses,
with crude oil
Euro zone government bonds and U.S. Treasuries rose in
other flight-to-quality trades. The benchmark 10-year Treasury
note
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