Global stock markets have breathed a sigh of relief after Abu Dhabi stepped in to prevent the financial collapse of its neighbour Dubai. The Central Bank of United Arab Emirates, based in Abu Dhabi, said it will support banks in the region to prevent a Lehman Brothers-style meltdown in Dubai.

The move comes after markets in both Dubai and Abu Dhabi suffered record falls in early trading, with the Abu Dhabi bourse dropping as much as 8 percent.

The loses in the UAE came on the first day of trading since it was announced that Nakheel had asked for trading of some of its Islamic bonds to be suspended.

Abu Dhabi’s priority has been to stop a bank run. Local banks are heavily exposed to Dubai World and the financial stability of the UAE is a federal responsibility. The central bank on Sunday set up a new special liquidity facility for lenders and said that it stood behind local and foreign banks based in the UAE.

However officials within oil-rich Abu Dhabi say it will not bail out the Dubai World conglomerate.

An unnamed official from Abu Dhabi has told Reuters that the authorities would provide financial help to Dubai only on a “case-by-case” basis, rather than underwriting Dubai’s entire $59bn debt liabilities.

Dubai World’s liabilities are commercial not sovereign, so bonds from its subsidiaries, including Nakheel, are not guaranteed by the government.

Dubai World’s $59bn of liabilities make up the majority of the emirate’s total $80bn debts.

Sources close to the Dubai government also said that the bail-outs by Western companies were being considered as potential models for restructuring the company.

This could include ring-fencing the problem debts, particularly from Nakheel, and putting them into a separate run-off.  This would model the Northern Rock collapse – whereby the toxic assets were separated off, leaving the rest of the bank to recover normally.

Dubai itself produces only 240,000 barrels of oil per day – compared to 2.7m barrels output of Abu Dhabi. The astonishing boom in property, financial services and tourism boom has been it’s attempt to diversify away from oil, but the global downturn has highlighted the extent of the overinflation and hype that fuelled the good times.

Investors have expected Dubai could count on the financial support of Abu Dhabi. It has already provided $15bn in indirect support for Dubai through the UAE central bank and two private Abu Dhabi banks.

The International Monetary Fund (IMF) is also closely watching how the Dubai Government will restructure Dubai World.

“We are continuing to monitor the situation following the unexpected announcement by the Government of Dubai regarding a standstill on the debt of Dubai World and its Nakheel subsidiary, which has had an adverse impact on financial markets,” an IMF spokesperson said.

“The United Arab Emirates is a strong resource-based economy and we welcome the announcement by the Central Bank of the UAE making available to banks a special additional liquidity facility. We look forward to further clarification by the authorities towards a co-operative mechanism to address the issues between these debtors and their creditors.”