The debt crisis facing the Dubai investment fund rattled investors for a second day on Friday, rekindling doubts about the vitality of emerging economies. Investors, however, said they had anticipated the deterioration of the country’s real estate bubble, and they considered Dubai’s troubles an isolated case.

In New York and throughout Asia, stocks endured sharp losses on Friday, responding to reports that Dubai World, the emirate’s investment vehicle, was seeking to delay for six months payments on all or part of its $59 billion in debt. European markets, which fell 3.2 percent on Thursday, calmed on Friday and closed higher.

The Dow Jones industrial average tumbled 154.48 points, or 1.48 percent, to 10,309.92 on Friday, recovering from a 225-point loss early on. The Standard & Poor’s 500-stock index fell 19.14 points, or 1.72 percent, to 1,091.49. The Nasdaq slipped 37.61 points, or 1.7 percent, to 2,138.44.

The quick evaporation of Dubai’s economic standing revived concerns among traders about the vulnerabilities of markets in places like Indonesia, Brazil and China.

“The fact is the equity markets globally have gotten way ahead of themselves,” said Dan Alpert, managing partner of Westwood Capital. “The stock markets and the bond markets are in violent disagreement, and at some point, it is going to be resolved by a sell-off in the equity markets.”

Led by emerging countries, stock markets have climbed at an incredible pace as the global economy has started to recover. Markets in emerging economies have gained 87 percent in the last year, according to the MSCI Emerging Markets Index, with investors piling in money in search of higher returns.

Dubai’s request for more time to repay debt sent the cost of insuring government and corporate bonds to levels not seen since July. Japan, Italy and Germany have posted some of the largest gains in risk in recent days, according to an index compiled by CDR Credit Indices.

Credit swaps rose for a third consecutive day on Friday. It now costs Dubai $647,000 to insure $10 million in debt for five years, up from $541,000 the day before. Indonesia’s cost increased by $12,000 and China’s by $6,000.

United States Treasury prices rose, as did the dollar, as investors fled equities for the safety of government-backed debt. The 10-year Treasury note rose 18/32, to 101 14/32, and the yield fell to 3.21 percent, from 3.27 percent late Wednesday.

Markets in Asia were sharply lower on Friday, with the Hang Seng in Hong Kong falling 4.8 percent. European exchanges finished slightly higher.

Some analysts said Friday that the declines were overdone, exaggerated by light trading over a holiday. A truer picture of the markets may not come until next week, analysts said, as buyers return and as more details of the Dubai crisis, and the exposure of banks, emerge.

“Dubai is really a symptom, a legacy, from the previous boom, rather than symptomatic of a start of a whole new set of issues that are going to create a systemic crisis in emerging markets,” Kevin Grice, senior international economist at Capital Economics in London, said. “Markets assume the worst-case scenario.”

Investors on Friday tried to assess just how much damage Dubai’s debt struggle would wreak on the global economy, and a question was how much exposure banks might have. Emerging markets have often seemed more vulnerable because their financial markets are not as deep and sophisticated as those in the West.

While that notion was proved wrong during the financial crisis, investors are still skittish about the developing world’s ability to handle a crisis. They need look no further than Bangkok, where a seemingly contained financial panic spiraled into a regional crisis more than a decade ago.

There is a fear that Dubai’s problems could rattle emerging market banks and financial institutions that have lent the emirate money.

On Friday, corporate officials across Asia started offering assurances that they had limited or no exposure to Dubai World and its subsidiaries. The Bank of Baroda, an Indian bank, said Friday that 5 to 6 percent of its loans were to Dubai entities, adding that those borrowers were current on all of their loans.

In Europe, a research note from Credit Suisse estimated that European banks might be the hardest hit if Dubai World could not meet its obligations, with total exposure estimated at 13 billion euros ($19.5 billion). European banks, however, played down their exposure.

During the boom, Dubai World and other fast-growing companies from the emirate invested heavily in companies and projects across Asia, building ports in India and Pakistan and taking stakes in Chinese banks. There is a fear that those projects and firms could suffer if Dubai authorities are forced to sell some of their holdings or put off investments to raise cash to repay their large debts.

David Riedel, founder and president of the Riedel Research Group, said the crisis in Dubai would probably cause some aversion to risk in the short term. However, he said it did not diminish the high hopes for emerging markets.

“It will cause people to think about the strength of the financial markets rally, which in many cases has outpaced the fundamental recovery,” he said. “But it doesn’t change anything about the emerging markets story, which remains very much intact.”

[...] they can't afford to let them go bankrupt and keep bailing them out.

That makes no sense.

You still haven't substantiated anything with that statement. All you've established is the negative of a proactive choice: in otherwords, all that statement says is if we don't perpetuate a state of debt, then the debt obligations we own become worthless.

Dubai World isn't going to bring in international tourism in such a way to pay back for the capital invested in it. One, because right now, the rest of the world mostly cannot afford to since the US is drying up capital reserves, and two, because people typically don't do that anyhow.