Burj Dubai, the world tallest tower, rises from the Dubai skyline. The government's decision to reorganize its economic development agency caused stocks to fall on Thursday. (Kamran Jebreili/Associate Press)

Financial markets worldwide were rocked Thursday after the government of Dubai announced a reorganization of its debt-laden economic development agency.

Stocks in London fell almost 5.5 per cent while exchanges in France and Germany dropped more than two per cent. In Asia, China's Shanghai index tumbled 3.6 per cent and Hong Kong's Hang Seng was off 1.8 per cent.

U.S. markets were closed for American Thanksgiving, but the Toronto Stock Exchange followed the downward trend. The benchmark S&P/TSX composite index lost 200.1 points to 11,436.8, while the Canadian dollar fell 1.35 cents to 94.30 cents US.

Gold, meanwhile, closed in on $1,200 US an ounce, trading up $5.80 to $1,192.80 as investors looked for solidity.

The global stock slump was in response to Wednesday's surprise announcement of an overhaul of Dubai World, the state-run organization that holds almost three-quarters of the Middle Eastern country's total debt. As part of the restructuring, Dubai World's creditors were asked to hold off on requiring debt repayments until at least May 30, 2010.

Dubai World, which has piled on $59 billion US in borrowing to fund the small nation's hyper-expansion, was supposed to repay $3.5 billion in December.

The debt repayment moratorium threw into question the company's ability to repay its debt. The restructuring process, which also includes property development firm Nakheel, sharpened investor concern about European and Asian banks that lent to Dubai World.

"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock-on effect," said David Buik, markets analyst at BGC Partners in London.

Dubious asset values

For years, Dubai World was at the forefront of Dubai's international expansion into port operations, hotels and other assets. Slumping real estate markets in many countries combined with the overall economic recession, however, killed the organization's financials and led to the restructuring.

Some estimates put European banks on the hook for as much as $40 billion in lending to Dubai World, money that could be at risk if the government corporation slips into some sort of court-sanctioned bankruptcy proceeding.

HSBC, Standard Chartered, Barclays and Royal Bank of Scotland's ABN Amro, which were hammered in 2008's financial drop, could now face problems in a Dubai World restructuring, analysts said.

With files from The Associated Press