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By Thomas Atkins
DUBAI, Oct 13 (Reuters) - Qatar launched a $5.3 billion plan to purchase bank shares on Monday in the most dramatic move to date by Gulf Arab states to shore up confidence in their banks, sending stocks across the region soaring.
Middle Eastern policymakers have joined Europe and the United States in combating a financial crisis that has battered bank stocks and threatened a five-year boom, and more moves by the cash-rich states to fortify capital defences are likely.
It also marks an acceleration by sovereign wealth funds -- the state run investment agencies that control trillions of dollars -- to invest at home instead of abroad, a sour turn for Westerners who had once counted on rich Gulf investors to bail them out of the financial crisis.
In the plan, the Qatar Investment Authority, the Gulf Arab state's sovereign wealth fund, will buy 10-20 percent of banks' listed capital on the Doha bourse based on Sunday's closing share prices, the state news agency said on Monday.
The announcement sent shares rocketing across the Gulf, with Dubai's main index .DFMGI marking a 10.5 percent gain -- its biggest ever. Qatar's .QSI leading index rose 8.5 percent.
"People are starting to have confidence in the market," said Adel Nasr, a local brokerage manager at United Securities, in Muscat.
In another sign of relief, credit tensions eased in the UAE and Saudi Arabia, where the interbank lending rates in both countries AEIBOR= SAIBOR= edged lower in one of the clearest signs of easing tensions since interbank rates began climbing marching higher in June.
The easing comes one day after the UAE said it would guarantee bank deposits. It clarified its position on Monday, saying it would cover deposits for three years including those with foreign banks with core operations in the Gulf Arab state.
"That was a very strong message sent by the government to reassure banks and depositors. We should see the markets easing and returning to normal soon," Walter Pompliano, head of treasury at Abu Dhabi Commercial Bank.
Kuwait is the only other Middle Eastern state to say point blank that its sovereign wealth unit would buy local shares to support prices with the view that the local bourse had suffered too much due to an investor exodus from developing markets.
Qatar's purchase plan and the UAE's guarantee come in a busy week for Gulf policymakers struggling to prevent contagion from the West's financial crisis from spreading. Saudi Arabia on Sunday slashed its benchmark repo rate by 50 basis points in a surprise move to restore confidence.
The plans reflect a multi-pronged approach by Gulf policymakers and more moves by other Gulf states are likely in the coming days, said banking analyst Raj Medha at investment bank EFG-Hermes in Dubai.
More measures might include placing sovereign deposits directly with commercial banks, recapitalising banks with weak capital bases, and flooding the interbank lending market with cheap liquidity to keep the banks lending to each other.
"It's a proactive approach from Qatar to pump liquidity into the system," he said. "They might also have to make deposits directly into the banks. The same is true for the UAE," Medha said.
Qatar's biggest banks include QNB QNBK.QA, Qatar Islamic Bank QISB.QA, Qatar Commercial Bank COMB.QA, Doha Bank DOBK.QA and Ahli Bank AABQ.QA.
The combined market capitalisation of the top six Doha-listed banks at Sunday closing prices was $26.4 billion, according to Reuters data, meaning the QIA plan would be worth $2.2-5.3 billion.
Additional reporting by Lin Noueihed, Stanley Carvalho, Amran Abocar and Raissa Kasolowsky; Editing by Victoria Main