Expected as early as next week, the emirate's first government debt sale since the bursting of its real estate bubble and subsequent debt crisis last year could be a step towards rehabilitating its image in the eyes of international investors.

"It has to be at a decent price. But it will find an audience, that's for sure," said Haissam Arabi, chief executive of Dubai-based Gulfmena Alternative Investments.

Banking sources told Reuters that the government was planning to issue up to $1 billion in bonds with a tenor of up to seven years.

Dubai's last sovereign bond sale was launched last October - barely a month before its flagship conglomerate Dubai World shocked investors by calling for a standstill on its debt. The company eventually asked for a standstill on $26 billion of debt.

But since then, Dubai World has secured near-unanimous creditor approval for its debt restructuring plans, while property subsidiary Nakheel is expected to complete its debt workout plan by year-end.

"The hard work has been sorting out Nakheel and Dubai World, and investors are more positive on Dubai because of its strong relationship to the rest of the UAE and as the legacy issues have been or are being addressed," said Aviva fund manager Jeremy Brewin in London.

"I am keen on owning Dubai debt."

Although its peers from the seven-member United Arab Emirates (UAE) have continued to access capital markets, the only Dubai name to have launched a bond so far this year has been state-run Dubai Electricity & Water Authority (DEWA), which raised $1 billion via a bond in April.

While the DEWA deal showed the market's readiness to take on more Dubai risk, the absence of a sovereign credit rating remains an obstacle to widening the range of investors beyond those willing to accept emerging market risk.

"You can still get onto benchmark indices without a rating. But getting a rating is a way of improving your transparency to investors as you have to open your books to the rating agency. Until Dubai gets a rating, it will have to pay a premium," said one London-based fund manager.

The manager, who declined to be named, said he made this point to Dubai officials during investor meetings earlier this year. Dubai is believed by the market to be intending to obtain a rating, but government officials have not confirmed whether it is doing so.

A credit rating would go some way to improving clarity over Dubai's creditworthiness, particularly as its state-owned companies sit on more than $100 billion in debt, including $30 billion due to mature in 2011-2012.

Fellow UAE member Abu Dhabi has been rated 'AA' by Standard and Poor's and Fitch Ratings; it is seen by many investors as a stronger credit thanks to its oil revenues.

Investors say pricing on Dubai's new deal will be determined by whether it obtains a rating and what that rating is.

"There's appetite, but it has to depend on the pricing and structure...But it's the right moment in the market," said Abdulkadir Hussain, chief executive of Mashreq Capital.

Dubai's five-year sukuk maturing 2014 is trading at a yield of around 6.4 percent. Investors say another comparable credit is DEWA's 2015 deal, currently trading at 6.755 percent.

Risk perceptions of Dubai have eased since last year and that has been reflected in the falling cost of insuring its sovereign debt. Though Dubai may have to step up asset sales and government borrowing in coming years to cope with the heavy debt repayment schedule for state-linked companies, many investors think its status as a financial centre and support from Abu Dhabi will avert any renewed crisis.

Five-year credit default swaps for Dubai have fallen from a 2010-high of 655 basis points in mid-February to around 420 bps.

"CDS spreads...are probably going to stay around there - they won't come down significantly more from there," said Mashreq Capital's Hussain.

A successful bond issue could have an important impact in encouraging secondary market trading of bonds within Dubai, some traders believe. Trading dried up after the Dubai World crisis but in recent months has been showing signs of recovery.