Dubai's government, buoyed by returning investor sentiment and the falling cost of borrowing international capital, is trying to lure investors with a potential 10-year dollar bond with a five-year put option, banking sources said on Tuesday.

The bond structure, unusual in the region and crafted by Dubai's Department of Finance, is aimed at allowing bondholders to redeem their investment before maturity at full value, the sources said. In return, bondholders would settle for a lower yield.

'It's a very innovative method to tap into market now for Dubai,' said a banking source familiar with the matter.

'The put option structure will ensure the cost of the bond remains lower. For Dubai, it's all about cutting costs now.'

The plan is being presented to potential investors at roadshow meetings in London, and a global conference call, this week.

The emirate known for its extravagant projects such as the Palm Jumeirah artificial islands and the world's tallest tower, Burj Khalifa, has been struggling to dig itself out of a debt hole since its 2009 fiscal crisis.

'The 10 year tenor with 5 year put is a somewhat unusual structure for sovereign bond issues in this region and demonstrates that the issuer is thinking outside the box,' said Chavan Bhogaita, head of markets strategy department at National Bank of Abu Dhabi.

'Furthermore, the 5 year put gives investors added flexibility and hence this should help to further enhance the appeal of the transaction.'

The issue would come under an existing $4 billion facility. Dubai is also launching a new $5 billion Euro Medium Term Note framework for future debt issuance, according to a prospectus released this week.

Spreads have narrowed to attractive levels in the last few months, in part due to Dubai's safe-haven status and relative political stability.

This has meant Dubai entities have been able to tap global liquidity at more attractive levels. Roadshows end in London on Tuesday.

Arranging banks are UBS, RBS, and Emirates NBD. The bond is expected to be benchmark sized, typically at least $500 million.-Reuters