Nov. 28--The danger of government debt defaults haunted financial markets yesterday as Dubai's woes focused minds on soaring budget deficits across the world.

The cost of insuring investors against the risk of countries failing to meet debt payments jumped in the wake of the Arab emirate's announcement that it can't meet its commitments to international investors.

So-called credit default swaps linked to sovereign debt issued by Abu Dhabi, Bahrain, Vietnam, Saudi Arabia and Greece saw the largest leaps over the past week, according to Bloomberg data.

The cost of protecting investors against the risk of Abu Dhabi failing to meet payments on $1m of five-year debts rose by $6,000, for example.

Governments have racked up vast debts bailing out stricken banks and attempting to kickstart their stalled economies. Investors fear some bonds are losing their safe-haven status -- especially if issued by smaller countries with heavy liabilities.

Economist Richard McGuire of RBC Capital Markets said: "The events in Dubai have raised concerns about how many skeletons may still be in the cupboard. They are prompting the markets to take a closer look at the fundamentals and differentiate more keenly between sovereign (state) issuers." Ted Scott, director at UK Strategy at F&C Investments, said: "For the European Union it underlines the disparity between the financially prudent north, with Germany at the helm, and the profligate south."

But concerns are not confined entirely to small economies. Deficits racked up by Britain are also spooking investors. British banks lent Dubai investment groups money that was used to buy stakes in UK institutions such the Tussauds theme park group, including Alton Towers.

Markets regained some of their composure yesterday as investors decided Dubai's problems could be contained. The FTSE 100 added 51.6 points to 5,245.73, while the Dow Jones Industrial Average lost around 1.2pc in midday trading. Global leaders argued it is unlikely we will see a ripple effect. Breaking from meetings of the Commonwealth in Trinidad, Prime Minister Gordon Brown said: "I think we are going to have issues like this at different points and different times, because of the fallout from what has happened over the last two years.

"But my own view is that the world financial system is stronger now and able to deal with the problems that arise."

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