UPDATE 3-Saudi launches $37 bln benefit plan, markets jittery
* King's $37 bln in social benefits effective March 1
* Economic, financial situation stable - Finance Minister
* Saudi Arabia's stocks post steepest drop in two years
(Adds Saudi share moves) By Ulf Laessing
RIYADH, March 1 (Reuters) - Saudi Arabia began distributing $37 billion in social benefits on Tuesday to ease the pain of inflation and unemployment in the world's top oil exporter and avert the popular unrest that has spread across the Arab world.
The OPEC producer has so far escaped the mass protests that have toppled entrenched leaders in Egypt and Tunisia, but the Saudi stock index .TASI posted its steepest drop in more than two years amid fears the turmoil could yet reach the kingdom.
"There will be immediate execution (of the king's measures)," Saudi Finance Minister Ibrahim Alassaf told repoters. "The ministry of finance transferred the relevant amounts today."
King Abdullah unveiled benefits for Saudis worth an estimated $37 billion after returning home last week from three months of medical treatment abroad. [ID:nLDE71M11C]
He earlier told a financial conference the largest Arab economy was stable after regional unrest cast a shadow over investors' outlook on Gulf markets.
"We have not seen any adverse impact on the Saudi economy," Alassaf reiterated.
Saudi stability is of global concern because the key U.S. ally holds more than a fifth of world oil reserves.
Earlier on Tuesday, Brent crude LCOc1 rose more than a dollar in response to a report in an Egyptian newspaper that Saudi Arabia had sent tanks to Bahrain, but a Saudi official said there was no truth to the story. [ID:nLDE7201OZ]
Saudi Arabia also faces the delicate task of reassuring markets that it will step in to increase output if prices get out of hand [ID:nLDE71Q05U]
While surging oil prices boost the country's revenues, Saudi currency forwards are near their weakest levels in two years. Debt insurance costs have also risen across the Gulf, the world's top oil exporting area.
The Saudi index in the Arab world's biggest stock market fell 6.8 percent in its biggest drop since November 2008 to its lowest close since July 13, 2009. [ID:nLDE7201WQ]
Part of the king's handouts will go to new funds to help Saudis to obtain housing loans, a pressing issue for the Gulf Arab state's growing native population of 18 million. Over 10 percent of locals are unemployed.
Alassaf declined to say when the cabinet would approve a much-delayed mortgage bill to address the housing issue, saying only that the kingdom's quasi-parliament, the Shoura Council, needed to act first.
Saudi Arabia has been mulling the bill for many years but analysts say it will not be effective unless it addresses the sensitive issue that much of Saudi land is owned by royals.
Alassaf also said spending would rise this year following the king's measures, but it was too early to say by how much. Budget revenue would also increase, he said.
Saudi Arabia plans to draw on its reserves to help fund the new social benefits, he said on Sunday. [ID:nLDE71Q03P]
Net foreign assets reached a record high of 1.67 trillion riyals ($445 billion) in January, nearly 9 percent up from the previous year, due mainly to rising oil prices.
Saudi Arabia, a member of the Group of 20 developed and emerging nations, has outlined spending of 580 billion riyals for 2011 in its third consecutive record budget, with a conservative revenue estimate of 540 billion.
Saudi analysts said the king might also reshuffle his cabinet to bring in new ministers and revive stalled reforms.
(Writing by Martin Dokoupil, Martina Fuchs and Reed Stevenson; editing by Lin Noueihed)