The battle over a $409 million convertible bond in Shuaa Capital intensified on Tuesday after bondholder the Dubai Banking Group (DBG) refused to accept new shares Shuaa issued as part of the deal.

Dubai-based investment bank Shuaa ended months of negotiations with state-controlled DBG by issuing 250 million worth of new shares to the group on Tuesday, effectively offering DBG a 32 per cent stake.

But regulators or the court are likely to have the final say in the tussle after Shuaa said it 'proved impossible' to reach an agreement and DBG said it would not accept the shares and wanted its principal investment of back instead.

DBG had purchased the bonds for 1.5 billion dirhams in 2007 near the peak of the economic boom that saw Gulf financial firms witness explosive growth.

The bonds were due to convert in October, 2008, but the two groups agreed to extend their maturity and negotiate following Shuaa's rapid share price fall.

Shuaa shares are down 80 percent from their 12 month high of 8.51 dirhams in June, 2008.

But since the financial crisis that hit the Gulf in late 2008, the state-controlled DBG has sought to renegotiate the terms of the bond after seeing the value of its investment plummet alongside the share prices of many financial groups.

'We will not accept the delivery of the conversion shares issued by Shuaa Capital,' DBG said in a statement.

'We have issued Shuaa Capital with a notice of redemption of the note for its principal amount and have demanded payment of the principal amount.'

Stock market operator Dubai Financial Market, said it would not register the newly issued shares in name of Dubai Banking Group until it received a joint letter from the two parties or an order from authorities to register the shares.-Reuters