DUBAI - THE United Arab Emirates began to bail out Dubai's rattled lenders, consolidate its financial sector and cap a building spree on Monday as the former boomtown began cutting state spending in the face of the global crisis.

In a major policy shift, the federal government will inject capital into Emirates Development Bank, a newly created rescue vehicle preparing to absorb merging Islamic lenders Amlak and Tamweel, a leading official said.

Mr Mohamed Alabbar, a member of the emirate's ruling council, assured investors the Gulf's self-styled regional financial hub of Dubai was able to meet its sovereign obligations as pressure from the global financial crisis mounted.

'We will see more consolidation, especially with third-party developers, who may be facing some lending difficulties,' Mr Alabbar said at a conference, the first official recognition that Dubai will have to pare back its lofty ambitions.

'We are rationalising our expenditure and consolidating our activities,' he said.

A federally funded bailout would a major policy shift for the 37-year-old confederation of seven seaside emirates where the federal government has played more a role of a facilitator than an underwriter of progress.

A cash injection would also represent the first big step by the federal government, dominated by the conservative oil-exporting emirate of Abu Dhabi, to bail out high-flying banks in neighbouring Dubai, suffering under the global crisis.

The UAE rescue comes on the heels of European and US bank rescues, the most dramatic of which emerged earlier on Monday when US authorities bailed out Citigroup Inc.

Dubai has resorted to drastic measures to stem the financial crisis in recent days, placing the planned merger of Amlak and Tamweel under a little-known state-run entity called Real Estate Bank, then placing Real Estate Bank into the newly created Emirates Development Bank (EDB), which will receive funding.

'The details are being worked out but the new entity will be supported by capital and funding,' Mr Alabbar said. -- THOMSON REUTERS