* Investors ignore Libya attacks, Saudi stimulus eyed
* Saudi bourse sees biggest gain in two weeks
* Dubai, Qatar indices climb more than 2 percent
(Adds Saudi index close)
By Praveen Menon and Dinesh Nair
DUBAI, March 20 (Reuters) - Massive handouts to the citizens of Saudi Arabia, the most economically important and influential Arab country, boosted investor sentiment in the Gulf on Sunday, eclipsing regional upheaval and Western air strikes on Libya.
The index of the Saudi bourse, the largest Arab market, ended 4.5 percent higher at a one-month high, after its biggest gain since March 5, before fears of unrest spreading in the Gulf spooked investors.
Stocks in Qatar and UAE rose by more than two percent.
King Abdullah decreed $93 billion in handouts on Friday to lift wages, create jobs and build homes for Saudi Arabia's rapidly-growing young population, trying to head off any potential discontent within its borders.
"Saudi Arabia contributes to almost 50 percent of the GDP of GCC (Gulf Arab) countries... a boost in the kingdom's economy will reflect in all regional markets and that's what we saw today," Hesham Tuffaha, head of research at Riyadh-based Bakheet Investment Group, said on Sunday.
The index may gain 2 to 3 percent more, reaching 6,500 points by the end of the week, Tuffaha estimated.
An exodus of businesses from unstable North African markets may eventually help lift the relatively safer Gulf markets of UAE and Qatar, analysts say.
"Local institutions and foreign buyers in the region are on a lookout for markets away from political tensions... UAE and Qatar provide such an environment," Samer al-Jaouni, general manager of Dubai-based Middle East Financial Brokerage Co, said.
The Dubai and Qatar benchmarks ended at a week high, gaining 2.6 percent each. Dubai bluechip Emaar Properties gained 3.9 percent and Arabtec surged by 9.2 percent to a four-week high. The latest handout by King Abdullah was in addition to the $37 billion announced last month to ease social tensions.
"In combination, both the stimulus plans in Saudi, will have some positive impact on the ground in the short-term," said Akber Naqvi, fund manager at Al Masah Capital in Dubai.
Saudi Basic Industries Corp (SABIC) advanced 4.6 percent and Al-Rajhi Bank climbed 5.1 percent.
Kuwait's bourse was one of the few losers, as the index was weighed down by a drop in shares of telecom firm Zain.
Zain dropped 4.4 percent to a three-week low, after Etisalat scrapped its $12 billion deal to buy a controlling stake in the Kuwaiti telecoms group.
TENSIONS CONTINUE
The markets showed little reaction to events in Libya, where European and U.S. forces unleashed warplanes and cruise missiles against Muammar Gaddafi's troops in the biggest Western military action in the Arab world since the 2003 invasion of Iraq.
Tension also continued in other Gulf Arab states like Bahrain, where troops cracked down on mainly Shi'ite protesters in the oil-producing region last week.
"What's happening in Yemen and Libya is not relevant for financial participants in the region," said Eric Swats, head of asset management at Rasmala Investments in Dubai.
"What continues to be a problem is Egypt."
Egypt's stock exchange has been closed since Jan. 30 and the bourse will announce in days, and probably in the coming week, a date for reopening, the state news agency quoted Prime Minister Essam Sharaf as saying on Saturday.
Recent political events have also increased the risk premium demanded by investors towards the region. Credit default swaps in countries hit by protests have widened as a result.
Bahrain's five-year credit default swaps have doubled since January, hitting 355 basis points on Tuesday, their highest level since July 2009.
The yield on Bahrain's Islamic bond maturing in 2014 jumped to a one-year high of 4.5 percent from 3.0 percent, after the Gulf state declared a state of emergency last week.
"Investor demand for debt issuances from the region is off for the time being," Swats said.
Bahrain's main opposition groups have eased their conditions for talks to end a crisis that has drawn in neighbouring Gulf armies and raised tensions in the oil exporting region. (Additional reporting by Martina Fuchs; Editing by Alexander Smith and Firouz Sedarat)