Asian markets rallied yest-erday, but Europe hit reverse gear, as investors digested moves by the UAE central bank to soothe worries over Dubai’s debt.

Hong Kong surged 3.25 per cent and Tokyo soared 2.91 per cent as fears over Dubai’s debt problems receded following a move by the UAE central bank to provide extra liquidity.

However, in late morning European deals, Frankfurt fell 0.75 per cent, London slid 0.64 per cent and Paris shed 0.85 per cent in value, with all three markets reversing opening gains in highly volatile trade.

The UAE central bank ann-ounced on Sunday that it was providing additional liquidity to banks, amid worries about  exposure to a possible default.

“Shares in London have come under some pressure as traders focus on developments in Dubai,” said analyst Tim Hughes at spread-betting firm IG Index.

“The UAE central bank commitment to providing liquidity for lenders has gone some way to help shore up confidence amongst investors.

“In the light of this, today’s move in London could equally just be put down to a normal pullback after Friday’s rise.”

British banks reportedly have a total exposure of $30 billion to Dubai World, according to recent media reports.

Meanwhile, Dubai’s debt risk, after jumping the most last week since January, is still below the level signaling a potential failure as investors expect the emirate will be rescued by Abu Dhabi, according to Bloomberg news wire.

The price of Dubai credit-default swaps implies a 32.5 per cent chance that the emirate will default on its debt by December 2014, according to CMA Datavision figures that assume a 25 per cent recovery rate.  

The cost of protecting Dubai bonds against default is the sixth-highest worldwide after Pakistan, Argen-tina and Latvia, and exceeds Iceland’s, according to CMA Datavision prices.

The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to meet its debts.

“Dubai has not pushed the world over the edge,” Comm-erzbank analyst Antje Praefcke said. “This recognition is increasingly taking hold on the markets this morning now that the central bank of the UAE has made it clear that it is backing the local and foreign banks of the emirate.

“For this aim it has already created new financing opt-ions for the resident banks. This does not solve the possible insolvency of Dubai World, but it does make a run on Dubai’s banks unlikely.”

Last week’s Dubai news has sent jitters throughout world markets, stoking fears of a possible default by Dubai and its state-owned businesses, which together owe $80 billion.

The announcement on Wed-nesday took many investors by surprise because it was made ahead of Thanksgiving in the US and the Eid holiday, and just two weeks before Dubai World subsidiary Nakheel’s $3.52 billion Islamic bond is due for repayment.

Elsewhere in Asia, Sydney jumped 2.83 per cent and Seoul gained 2.04 per cent.

Tokyo shares rallied with confidence also buoyed by government plans for an extra stimulus of more than $31 billion this fiscal year to tackle the surging yen and weak equities.