Thursday’s surprise news of a possible default by Dubai World shocked the financial world and caused stock markets to tumble amid concerns about the effect on the stability of the global financial system.

Dubai government’s announcement it was seeking a six month delay on debt repayments of state-owned Dubai World – the flagship conglomerate behind Dubai’s rapid expansion and extravagant property developments – caught investors by surprise. Dubai World’s $60 billion debt represents a massive portion of Dubai’s total debt of $80 billion.

Speculation about a potential sovereign default sparked a sell-off in global equities, high-yield corporate bonds and commodities, while the US dollar and Japanese yen surged in a flight to safety move.

Credit rating agencies slashed ratings on Dubai’s government-related debt. UAE’s federal government in Abu Dhabi, having already bailed out Dubai with $10 billion earlier this year, may yet need to provide another bailout.

Dubai’s vastly ambitious, eye-catching building projects became the poster child of the emirate’s turbo-charged expansion in recent years. Concerns about a supply and demand imbalance started being raised in the last couple of years, and – adding the global financial crisis and the disappearance of international buyers – Dubai’s property prices have tumbled by around 50% since their 2008 peak.

While US banks’ exposure to the region is thought to be limited, UK lenders have the most to lose from a crisis in the Emirates, with a combined $49.5 billion of loans outstanding.  According to JPMorgan Chase, the Royal Bank of Scotland underwrote more Dubai World loans than any other institution, while HSBC has the largest capital exposure to the UAE.

While initial fears of the Dubai crisis sparking a new financial meltdown have faded, and European stock markets rebounded on Friday, the fallout has shown the continuing vulnerability of the global markets and economy.