The Dubai Tower, the super-tall skyscraper under construction is seen in Dubai, United Arab Emirates November 27, 2009.(EPA)

NEW YORK (AP) – Dubai's debt crisis rattled world financial markets Friday, raising concerns that some banks could further tighten lending and stall the global economic recovery.

The possible spillover effects centered on fears that international banks could suffer big losses if Dubai's investment arm defaulted on its $60 billion debt. Stock and commodity markets tumbled in New York, London and Asia as investors flocked to the U.S. dollar as a safe haven.

But earlier concerns that the crisis might trigger another financial meltdown seemed to ease after some analysts downplayed the risks for US banks, which are thought to have little exposure to the Middle Eastern city-state.

US stocks fell sharply but rebounded from their lows as investors concluded that the damage might be contained. The Dow Jones industrial average lost about 155 points, or roughly 1.5 percent, in a shortened trading day, and other stock averages also sank.

In Europe, stock markets rebounded after Wall Street fell less than feared. Earlier, stock indexes in Hong Kong and South Korea tumbled 5 percent in response to the previous day's Dubai-related losses in Europe.

The Dubai crisis caused the dollar to spike higher against the euro and pound but slump against the yen, another traditional safe haven.
Speculation that the Bank of Japan might intervene by buying dollars or selling yen to aid Japanese exports helped the dollar recover after it had fallen to a 14-year low against the yen.

European banks appeared to be at most risk if Dubai World can't pay its bills. London-based lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177 million respectively, according to early estimates from analysts at Goldman Sachs. Both have substantial Middle East operations.

"I don't think the collateral damage is going to be that great,'' said Jeffrey Saut, chief investment strategist at Raymond James. "People will dig into this over the weekend, but I think balance sheets have healed enough to withstand a shock like this.''

Still, the crisis in Dubai pointed to the vulnerability of the global economy despite signs of recovery. Last year's credit debacle left major banks with billions in losses, forcing them to reduce lending to consumers and businesses.

Access to credit has improved in recent months, but analysts said Dubai's woes could make some banks more cautious. That could further squeeze lending and weaken the recovery after the deepest recession in decades.