Dubai debt insurance costs surged to 2-1/2 month highs and bond yields rose as growing uncertainty over the fate of the debt-laden conglomerate Dubai World sent investors scrambling to hedge their exposure.

The five-year 2014 bond issued last November by the Dubai Department of Finance -- the emirate's finance ministry -- sold off heavily, falling 2 points to a record low 86.5. The yield rose half a percent to about 10 per cent according to Reuters data.

"Dubai cash bonds are selling off massively. The 2014s have fallen to the 80s because of all kinds of rumours, none of them substantiated," a bond trader in London said.

Dubai credit default swaps traded as high as 660 basis points at one stage but CMA DataVision said they were quoted around 640 bps by 1515 GMT.

That is the highest level since November when Dubai asked creditors for a standstill on some $22 billion of state-run Dubai World's debt.

A CDS broker said demand for protection on Dubai was the heaviest in many weeks.

Dubai debt insurance costs have been on the rise in recent sessions, and have jumped close to 150 bps since the start of February due to continued lack of clarity on the restructuring.

A $10 billion bailout by wealthy neighbour Abu Dhabi had allowed Dubai to make a December coupon payment but a maturing 2011 bond, owed by Dubai World's real estate subsidiary, Nakheel is one of the focal points.

The bond wass down 1.5 points yesterday (February 12).

A banker familiar with Dubai debt told Reuters markets have also generally been jittery following the publication of an article in al-Ittihad newspaper quoted sources as saying Dubai World would ask creditors for a six-month debt standstill.

Effective from end-February that would cover $980 million payment of a Nakheel floating rate note due in May.

"Generally people are in panic mode over Dubai now and the global risk appetite situation is not helping - Dubai is seen as the weak link," the banker said. "Before the article, people had been hoping they would pay the bond."     Dubai World has declined to comment.

Analysts said attention is also focusing on $1.2 billion syndicated Islamic loan coming due end-March by Dubai World subsidiary Limitless -- identified earlier as one of the firms whose debt is subject to restructuring.

Banking sources told Reuters earlier this week that the Limitless loan-- syndicated by 18 banks from the Middle east, Asia and Europe -- would be rolled over.

"If they don't pay up it will be the first time a Dubai World entity will default so it is a kind of test," one source said. – Reuters