UPDATE 2-Gulf sovereign funds turn cool on West after Lehman

(Writes through with KIA comments)

By Stanley Carvalho and John Irish

ABU DHABI/DUBAI, Sept 15 (Reuters) - Top Gulf Arab sovereign funds were in no mood to ride to the rescue of troubled Western firms on Monday but signalled greater investment at home to shore up regional bourses hit by the global financial turmoil.

Already battered by tensions with Iran and an overheated real estate sector, Gulf Arab bourses touched 17-month lows on Monday after Lehman Brothers LEH.N became the second major U.S. investment bank to fall in the U.S. credit crunch.

But Gulf Arab funds, who have already lost billions of dollars they entrusted to Western banks in emergency capital-raising exercises this year and last, have no plans to come to the rescue again just yet.

Chief Operating Officer Waleed al-Muhairi of Abu Dhabi government-owned Mubadala, one of the region's most active investors, told Reuters: "Mubadala is not looking at any of these financial players that are going through difficulties. There is a good amount of volatility, and it is not the best time to invest."

"Right now, we, like some others, will wait and see."

Those sentiments were echoed in nearby Doha. An official close to the Qatar Investment Authority, which holds a 20 percent stake in the London Stock Exchange (LSE.L) and 2 percent of Credit Suisse (CSGN.VX), said it was in "wait and see" mode.

Those investments have so far proven sound, but Kuwait's sovereign wealth fund, which invested $5 billion in January in U.S. banks Merrill Lynch and Citigroup, now faces pressure from members of parliament angry over the loss of public funds as the stocks have since been hit.

Merrill Lynch agreed on Monday to a takeover by Bank of America (BAC.N).

KIA has declined to comment on the current crisis but said it was increasing its holdings in stock market funds in an effort to lift its sagging bourse.

"KIA has announced today that it has decided to increase its participation in investment funds in the local market and study other investment opportunities," KUNA reported.

Worth some $3 trillion, global sovereign wealth funds have so far directed most of their investments into developed markets, but many are now eyeing a return to domestic markets hit by a weak dollar and high commodity prices.

In an earlier sign of caution, Kuwait's Finance Minister Mustapha al-Shamali said in July that KIA would boost investments in Asia with a focus on Japan, China and India, considering stocks, bonds and real estate to diversify assets.

Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, bought a $7.5 billion stake in Citigroup (C.N) in November. It declined to comment on Monday. (Additional reporting by Ulf Laessing; writing by Lin Noueihed)