Dubai government may write off its $1 billion loan to state-owned DIFC Investments in exchange for shares and infuse additional capital of $600 million to help the struggling group restructure its debt pile, JP Morgan Securities said in a research note.

DIFC Investments (DIFCI), the parent of Dubai's tax-free business hub DIFC, has been grappling with a debt pile of more than $3 billion, hurt mainly by a fall in the value of its investments.

'A key belief associated with a positive outcome for DIFCI's sukuk holders is an assumption of support by the government,' JP Morgan analyst Zafar Nazim said.

Nazim upgraded DIFC Investment's Islamic bond maturing in 2010 to 'neutral' from 'underperform', citing the restructuring programme and asset sale plans.

'These sukuk though appear fully valued after the recent rally and we would be buyers of (the Islamic bond) if the sukuk were to dip to the mid-70s,' Nazim said.

Any support from the government will depend on Dubai's own financial position in 2012, DIFCI's operating performance and management's success in the restructuring programme, he added.

Dubai is restructuring debt at its flagship conglomerates in the wake of a property market collapse and the financial crisis.

The emirate is labouring under more than $100 billion of debt, including $14.4bn in bank debt linked to state-owned Dubai World.

JP Morgan values DIFC Investments assets at about $2.4 billion and said the company's assets provide 'significant coverage' over debt.

Nazim said he expects the firm to raise about $900 million from its sale of non-core assets and sees a debt level of $400 million to $700 million as a 'sustainable level'.