* Dubai launches $600 mln 5-yr tranche, $650 mln 10-yr portion
* Both tranches launched at tight end of yield guidance
* Order books around $4 billion - sources
* Demand lifted by pickup in economy, Islamic format (Adds details, analyst comment)
By Rachna Uppal
DUBAI, April 25 (Reuters) - The Dubai government launched a $1.25 billion two-tranche Islamic bond on Wednesday, issue arrangers said, at the lower end of earlier indicated yield guidance, signalling healthy appetite for the emirate's latest debt market foray.
Dubai launched a $600 million 5-year tranche at 4.9 percent and a $650 million 10-year tranche at 6.45 percent. Final guidance issued earlier on Wednesday had been tighter than initial indications from the previous day.
Three sources said order books were almost $4 billion when books closed at about 0830 GMT. Order books for the emirate's foray into capital markets -- a $500 million 10-year issue last June -- were below $2 billion.
The new bonds were already trading higher in the grey market, an indication of demand for the deal. The five-year tranche was trading 0.25/0.50 higher while the 10-year part was up 0.20/0.45 percent, according to two regional traders.
"The continued pickup in Dubai's economy, led by the external sectors, should support demand for the issue along with the strong appetite for Islamic bonds," said Monica Malik, chief economist at EFG Hermes.
Dubai's budget deficit narrowed sharply to 3.7 billion dirhams ($1 billion) last year, helped by higher oil revenues and lower spending on development projects, a sovereign bond prospectus produced by the emirate showed.
Helped by an economic revival in trade and tourism and its safe-haven status amid the Arab Spring civil uprisings, Dubai has been climbing back from the depths of its debt crisis of 2009 which caused many jittery investors to flee overnight.
Proceeds of the issue will be used to cover the budget deficit and refinancing debt, a senior government official, requesting anonymity, told Reuters on Tuesday.
The government has direct public notes' maturities of 6.5 billion dirhams in 2013, according to the latest bond prospectus, and just over 7 billion dirhams in 2014. In addition, related party debt, consisting of a $20 billion facility borrowed from Abu Dhabi in 2009 also matures in 2014.
Citi, National Bank of Abu Dhabi, HSBC and Dubai Islamic Bank are mandated bookrunners on the new deal which will price later on Wednesday.
Dubai is the latest to take advantage of global demand for Islamic bonds. Sukuk issues have dominated regional bond sales this year and issues have been heavily oversubscribed. (Additional reporting by Martin Dokoupil and Mala Pancholia; Editing by Amran Abocar)