Dubai developers Deyaar and Union Properties denied on Tuesday that they were in merger talks but were unable to say if the government was looking into ordering a tie-up amid tightening liquidity.

On Monday, a news agency reported that Deyaar was mulling a $4.3 billion merger with Union Properties.

The report came after weeks of speculation into looming consolidation in the real estate sector and days after Dubai mortage lenders Tamweel and Amlak said they were in talks to merge.

'There is no foundation on this. We have not talked to Union Properties; I was shocked when I read it,' Deyaar chief executive Markus Giebel told reporters.

But answering a question on whether a merger could be government-orchestrated Giebel said: 'I am not privileged to government talks.'

His comments were echoed by Union Properties chief financial officer Zaid Ghoul, who told Reuters that his firm was 'not aware of any official discussions concerning a possible merger with Deyaar' but was not privy to government plans.

'Looking at a merger there are many aspects to consider. The business models between the two companies are different,' he said.

In 2007, two Dubai banks merged on the behest of the ruler, creating the country's largest lender and analysts say the impact of the global credit crunch could speed up government-encouraged consolidation to create larger companies better able to weather financing difficulties.

'This is a way of raising funds basically. This is why you are seeing companies selling out because the bigger the entities are, the stronger it will be,' said Chahir Hosni, sales manager at EFG-HERMES.

'Apparently there are talks, whether its going to go through or not, these things usually take time.' Both UP and Deyaar have said the credit crunch could make financing more expensive for them but Ghoul said the panic will cool within six months.

'The fever will come to an end in the next three to six months. The picture will be clearer on a credit standpoint in the UAE and in the region,' Ghoul said. 'The cost of funds will be higher than when we raised the first Dh3.75 billion last year.'

Haissam Arabi, managing director of asset management group, Shuaa Capital, said market conditions were ripe for consolidation. 'Given where valuations are today, mergers and consolidation should be the name of the game,' he said.

'It helps in making a stronger balance sheet, it helps in terms of funding so why not at a time when there's a global markets meltdown, it's a smart hedge.'

Speculation about a possible merger did little to help flagging real estate shares however. Deyaar ended 9 percent down on Tuesday and Union Properties 6.5 percent down.-Reuters