Gulf Arab oil producers are still at the start of forming a single currency and may not follow the European Union model, the United Arab Emirates central bank governor said on Monday.

The UAE, Saudi Arabia and four other oil producers have been working toward monetary union by a 2010 deadline that policymakers across the world's top oil-exporting region have said would be difficult, if not impossible, to meet.

'GCC monetary union is a long-term objective,' Sultan Nasser al-Suweidi told an investment conference in the UAE capital, Abu Dhabi.

'We are at the beginning of the road,' Suweidi said.

He did not say when he expected the six states to achieve the beleaguered common currency project, which was first thrown into doubt in 2006 when Oman said it would not join by the 2010 deadline.

Oman has decided not to join the union at all, its central bank governor told Reuters earlier this month.

Kuwait also broke ranks with its neighbours by dropping its peg to the dollar in May, saying the weak US currency was fuelling inflation because it was making some imports more expensive. The dollar pegs were intended to stay in place until monetary union.

Gulf states may move away from following the example of the European Union, which determined monetary union criteria in the Maastricht Treaty, Suweidi said.

'The GCC countries might not follow the example of the European Union and the euro,' he said, without giving details.

An inflation target of no more than 2 percent above the regional average is the most contentious of EU-style criteria agreed by the six states, which also include Qatar and Bahrain.

As part of the Maastricht Treaty, inflation in each European member state cannot be higher than 1.5 percentage points above the average annual inflation rate of the three member countries with the lowest rate.

Gulf inflation has surged as economic growth, spurred by record oil prices, strains capacity. Still, Gulf central banks are forced to match U.S. interest rate cuts to defend their dollar pegs, constraining their efforts to fight price rises.

Inflation in Bahrain, the lowest in the region, was about 4.1 percent in December, while in Qatar, contending with the fastest pace of price rises, inflation was just off a record at 13.74 percent in the fourth quarter.

Dollar pegs are helping Gulf states accomplish a monetary union objective of 'eliminating or reducing transaction costs', Suweidi said.

'(Gulf currencies) are pegged to the dollar and that has given the anchor that's needed to reduce the transaction cost of our currencies,' he said.

They still needed to work on payment systems, and harmonise laws in areas such as land ownership before they could form a common market -- a precursor to a common currency, he said. Gulf rulers agreed at a meeting in Doha in December to form a common market this year. - Reuters