FACTBOX-Key political risks to watch in the UAE

DUBAI, July 1 (Reuters) - The cloud over the financial future of Dubai after the Dubai World debt crisis is the overriding risk to watch in the United Arab Emirates this year.

Added to that are some lingering worries about an escalation of Iran's nuclear dispute with Western powers, a long-running territorial row with Iran and Islamist extremism.

DUBAI DEBT AND FINANCIAL WOES

The United Arab Emirates' economy is expected to grow by 2.5 percent this year, the slowest pace in the Gulf Arab region, as large debts burdening state-linked firms in Dubai weigh on a recovery following the Dubai World debt crisis.

Dubai's finances had already been a subject of concern after the global financial crisis popped a property bubble that saw multi-billion-dollar projects shelved and thousands of job cuts. The UAE economy is estimated to have shrunk 1.4 percent in 2009.

But the real shock came when Dubai World, one of three flagship holding companies of the Dubai government, said in November it would seek a delay on repaying $26 billion of debt linked mainly to property units Nakheel [NAKHD.UL] and Limitless, sending global markets into a tailspin.

Neighbouring Abu Dhabi, the seat of the seven-member UAE federation and home to most of its oil wealth, lent Dubai $10 billion, helping avert default on a bond issued by Nakheel.

Dubai World reached a deal in May to restructure $23.5 billion in debt with its core lenders, addressing the most immediate of a string of problems facing investors in Dubai.

The deal must still be agreed by banks outside the core negotiating panel, which holds 60 percent of the exposure. Failure at that could damage the UAE's ability to tap credit markets for years to come, hindering growth.

Debt troubles at Dubai Inc, as the network of state-linked firms are known, remain a worry for investors. Private equity firm Dubai International Capital, a unit of Dubai Holding, in May requested a three-month delay on repaying some obligations.

Meanwhile, Dubai Holding, owned by the Dubai ruler, faces challenges to meet some $14.8 billion in obligations.

Analysts say Dubai's debt crisis has strained relations between Dubai, known for extravagant real estate projects, and the wealthier but more staid Abu Dhabi.

The two emirates have shared the financial and political reins of the UAE since its inception in 1971, but further assistance from Abu Dhabi could boost its role at the helm of the federal union, possibly upsetting a delicate power balance.

What to watch:

- The final outcome of the Dubai World deal with creditors.

- Will Abu Dhabi have to intervene further to meet any Dubai debt obligations? Abu Dhabi would prefer Dubai stand on its own and wants to contain further spillover effect from Dubai's debt onto its economy and that of the federation.

BUSINESS SENTIMENT

Lack of transparency and worries about government guarantees for the debt of massive state-linked companies will make investors wary about keeping their money in the country after Dubai's debt debacle.

Dubai needs to take concrete steps to improve transparency and communication after initially leaving investors in the dark about the fate of their money and making overly optimistic -- and confusing -- statements at the height of the crisis.

Whereas other Gulf states funded growth with proceeds from soaring oil prices, Dubai borrowed to invest through a network of state-linked conglomerates that offered limited transparency.

Creditors lent to state-linked Dubai companies on the implicit understanding that they would be backed by the Dubai government only to find there were no such formal guarantees.

Dubai World's troubles have raised fears among investors that other state-linked firms could also face problems. Moody's downgraded seven Abu Dhabi state-linked firms in March, citing a lack of explicit state support in the wake of Dubai's crisis.

What to watch:

- The possibility of debt problems emerging in other state-linked units, which could hamper investment.

REGIONAL ISLAMIST MILITANCY

The United Arab Emirates, the world's third largest oil exporter, has so far been spared major al Qaeda attacks that have hit other Gulf states but as a regional business and tourism hub it could make an attractive target for militants.

Al Qaeda sparked fears of a regional resurgence after the merger last year of the group's Yemeni and Saudi branches into a Yemen-based regional arm, which went on to claim responsibility for a failed plot to bomb a U.S.-bound plane in December.

The group has threatened attacks on Westerners in the Gulf region and seeks the fall of the U.S.-allied Saudi royal family.

While the UAE may not be al Qaeda's top target in the region, it has many potential targets, with a large expatriate population and Western institutions such as retail outlets, restaurants, banks and schools, as well as bars and nightclubs.

The UAE does have tight security that may have helped it ward off attacks until now, but as an old regional trade centre it has had an open door to people from many walks of life. This has also made it vulnerable to international score-settling.

Earlier this year a Hamas leader was killed in a Dubai hotel room, in a hit widely blamed on Israel.

What to watch:

- Any expansion of attacks by the Yemen-based al Qaeda arm in the region could mean that all Gulf countries, including the UAE, are at risk of being targeted. A serious attack could unsettle local and international markets, particularly energy.

- Could the UAE become the scene of more potentially destabilising political assassinations by foreign elements? More score-settling could prompt the UAE to tighten entry rules on what has been an open business and tourism hub.