A debt default by the state-owned Dubai World has caused investors to sell off shares in Asian banks and raised fears of renewed financial turmoil.

Stocks from Tokyo to Mumbai reacted badly on Friday to news of lenders' exposure in the firms that built artificial island housing developments in the Gulf emirate.

Banks in Asia and Europe were quick to distance themselves from Dubai, which emerged from obscurity to invest in financial institutions like Standard Chartered and which lured fund managers with the promise of a tax-free lifestyle.

Shares on the Hang Seng Index plunged 3.45 per cent after the morning session, down 765.28 points to 21,445.13 as a result of the panic.

European stocks fell to lows not seen since May and bonds jumped after the restructuring was announced.