Abu Dhabi is providing $10bn in funding to bail out its fellow emirate Dubai, enabling it to settle a $4.1bn Islamic bond (so called sukuk) owed by troubled developer Nakheel due on Monday, the official news agency said.

The government of Dubai said in a statement that the remaining funds would be used for interest payments and working capital until April 30 next year on the condition that Dubai World, a heavily indebted state-owned conglomerate, reached a standstill agreement on the remaining portion of $26bn in distressed debts.

The funds would also be used to meet the needs of existing trade creditors and contractors, the government said.

People close to Nakheel say it owes as much as Dh11bn ($3bn) to contractors even after agreeing cuts of about 25 per cent with some suppliers in the spring. Cash flow has dried up as property prices in Dubai have halved.

The Dubai Financial Market jumped 10 per cent on the news.