* Qatar drops after speculators overestimate foreign demand
* Frontier funds still selling Qatar, UAE stocks
* Dubai, Abu Dhabi bourses slip on end-week profit-taking
* Arabtec falls after ex-CEO says no stake sale deal yet
* Saudi Arabia's uptrend slows, banking stocks retreat
By Olzhas Auyezov
DUBAI, Aug 28 (Reuters) - Qatar's bourse dropped sharply on Thursday as selling by retail investors and frontier market funds more than offset inflows related to the country's increased weighting in MSCI's emerging market index.
The Doha index fell 3.1 percent, its biggest daily decline since February 2011. Mobile phone operators were hit hardest: shares in both Ooredoo and Vodafone Qatar tumbled their daily 10 percent limits.
Islamic lenders Masraf Al Rayan and Qatar Islamic Bank dropped 7.8 and 4.4 percent respectively. The only gainers were Qatar National Bank and Qatar Insurance Company, up 1.8 and 2.0 percent.
Qatar's bourse had risen 3.4 percent to a fresh all-time high since index compiler MSCI said on Aug. 17 that it would increase the weight of several Qatari stocks in its emerging market index at the end of August.
"A lot of traders took positions in the market expecting a strong closing due to the MSCI adjustment," said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi.
They were expecting a jump similar to the one seen at the end of May, when Qatar was first included in the MSCI benchmark and the bourse jumped 2.0 percent as many passively managed funds moved in on the same day.
But the volume of speculative buying seems to have surpassed actual fresh demand from passive funds, which EFG Hermes estimated at only about $100 million.
At the same time, funds tracking the MSCI frontier market index to which Qatar and the United Arab Emirates previously belonged, such as U.S.-based exchange-traded fund iShares MSCI Frontier 100, were due to sell part of their UAE and Qatari investments on Thursday, according to the index methodology published on MSCI's website.
The Qatar market's traded value rose to 1.68 billion riyals ($461 million) on Thursday and foreign institutions were the main buyers. Foreign holdings in Qatar National Bank and Industries Qatar, which are having their MSCI weights increased, rose by 0.05 and 0.08 percent respectively, working out to inflows of $19 million and $25 million.
At the same time, foreigners were net sellers of stocks such as Oooredoo and Vodafone Qatar, according to bourse data.
Selling by frontier funds also appeared to affect markets in the UAE on Thursday.
Dubai's bourse fell 1.2 percent with most stocks in the red. Builder Arabtec, which dominated trading, fell 1.7 percent to 4.71 dirhams, even though its biggest shareholder and former chief executive Hasan Ismaik said on Wednesday the stock was worth over 5 dirhams.
Investors may have been disappointed by the fact that Ismaik, who made his comments after Arabtec shares jumped 13 percent to 4.79 dirhams over the previous four trading days, did not confirm rumours of an imminent deal to sell part of his stake to Abu Dhabi state fund Aabar Investments.
DP World, one of the world's largest port operators, sank 3.5 percent even though it reported a 26 percent rise in net profit for the first half of the year to $332 million; analysts had expected $290-300 million.
Abu Dhabi's bourse slid 1.1 percent and three large banks, all parts of the MSCI index, were the main drags on the index. Abu Dhabi Commercial Bank dropped 5.8 percent, National Bank of Abu Dhabi fell 2.1 percent and First Gulf Bank was down 1.4 percent.
MSCI's transition plan for frontier funds includes three more adjustments at the end of September, October and November. Some of the money freed up this way will go to Kuwait, which remains a frontier market. Kuwait's main index added 0.1 percent on Thursday.
Elsewhere in the region, Saudi Arabia's petrochemical stocks continued their advance, fuelled by hopes for strong product demand from key markets. The sector's index added 0.7 percent.
But the main Saudi index added just 0.1 percent, dragged down by profit-taking in banks which had earlier jumped on expectations of wider interest margins thanks to the projected increase of U.S. interest rates.
Alinma Bank fell 2.3 percent, Al Rajhi Bank slipped 0.3 percent and Bank Albilad was down 1.2 percent.
* The index fell 3.1 percent to 13,443 points.
* The index slid 1.2 percent to 4,928 points.
* The index edged down 1.1 percent to 5,071 points.
* The index edged up 0.1 percent to 11,042 points.
* The index rose 0.7 percent to 9,435 points.
* The index added 0.1 percent to 7,404 points.
* The index climbed 0.2 percent to 7,361 points.
* The index rose 0.1 percent to 1,476 points. (Editing by Andrew Torchia)