Gulf stock markets ended their worst quarter in years on Monday as speculative bubbles continued to deflate in some stocks while the security crisis in Iraq and a lull in activity during the holy month of Ramadan dampened fresh buying.

The Dubai index tumbled 4.4 percent to a three-month closing low of 3,943 points, bringing its losses from a multi-year peak hit in May to 27 percent - although it is still up 17 percent year-to-date. Dubai's drop dampened the market in neighbouring Abu Dhabi, which sank 2.1 percent.

Fund managers said the losses were not due to any negative economic news in the United Arab Emirates, where business confidence remains strong.

Instead, the markets are vulnerable to profit-taking after posting huge gains since the end of 2012. UAE and Qatar markets soared in the months before index compiler MSCI upgraded them to emerging market status at the end of May, putting them on the global investment map.

The upgrade attracted several billion dollars of fresh foreign funds but also fuelled aggressive speculation by local retail investors, who used leverage in an attempt to front-run the index changes but ultimately created a stock market bubble.

In Dubai's case, the bursting of the bubble has been made worse by management turmoil at construction firm Arabtec , one of Dubai's most heavily traded stocks. Arabtec shares more than tripled in price this year before beginning a freefall that has now cut their value by two-thirds.

Arabtec and major shareholder Aabar investments have not clarified their relationship or their business plans since Arabtec chief executive Hasan Ismaik abruptly resigned in June. Fund managers have complained that the lack of disclosure has hurt confidence in the entire market.

"Arabtec continues to drive the pressure," said Rami Sidani, head of investment at Schroders Middle East. "There is still a lot of uncertainty around the stock."

Arabtec and four other stocks - construction firm Drake and Scull, developer Union Properties, bourse operator Dubai Financial Market and lender Ajman Bank - plunged their 10 percent daily limits on Monday.

The sharp drops appeared to trigger margin calls for leveraged investors, forcing them to sell even more stocks.

"We believe that there is some degree of leverage on the market, and that is exacerbating the pressure," Sidani said.

Monday's drop extended Dubai's second-quarter loss to 11.4 percent, its first decline since the second quarter of 2012. Abu Dhabi's quarterly loss of 7.0 percent was its biggest in four years.

Qatar's bourse, which hit an all-time closing high of 13,697 points on the first day after its MSCI upgrade, slid 1.6 percent to 11,489 points on Monday. It posted a quarterly loss of 1.3 percent, its worst since the fourth quarter of 2012.

Other Gulf markets rose more slowly earlier this year so they have not retreated as much in recent weeks. But they have also performed poorly in the last month.

Saudi Arabia's index, which was almost flat on Monday, added just 0.5 percent in the second quarter, its worst result since the end of 2012.

The slide in Dubai, where some big Saudi investors operate, has affected the Saudi market, while the onset of Ramadan traditionally prompts profit-taking by retail investors.

The heavy fighting in Iraq has also dampened Gulf markets. There is no direct, major security threat to the wealthy Gulf oil exporting economies, but the declaration of an Islamic "caliphate" in Iraq on Sunday and the appeal to Muslims around the world to pledge allegiance were a challenge to the Gulf monarchies.

Kuwait's bourse has long underperformed the region as friction between its parliament and cabinet delay large and badly needed infrastructure development projects.

The Kuwaiti market posted its worst quarter in three years, sliding 7.9 percent; last week the country's ruler urged Kuwaitis not to talk publicly about an investigation into reports of a recording of people discussing an alleged plot against the governing system.

So far there is no clear sign of when Gulf stock markets will pull out of their tailspin. The latest Reuters survey of 15 leading investment managers, conducted over the past 10 days and published on Monday, showed only 13 percent expect to raise their equity allocations to the Middle East over the next three months - the lowest ratio since the survey was launched in September last year. Twenty percent expect to decrease their allocations.

However, many fund managers say they remain bullish about the markets in the long term as high oil prices continue to boost the region's economies, and as the pull-back in stock prices brings valuations in line with fundamentals.

In a report on Monday, Bank of America Merrill Lynch suggested overweighting the Saudi Arabian market because of its improving economy. It suggested underweighting the UAE because of still-unattractive valuations and weakening inflows of funds, and being neutral on Qatar.

Second-quarter corporate results, which will start trickling in next week, may become a catalyst for recovery in the UAE market, said Sanyalak Manibhandu, manager of research at NBAD Securities in Abu Dhabi.

He also thinks the presence of a larger number of international investors, in part thanks to the MSCI upgrade, will support the UAE and Qatar.

"The UAE market has become more of an institutional market to the extent that we are now part of MSCI's emerging market index," he said. "There will be more institutions that will look at the market and buy at certain points."-Reuters