Analysts said the main drivers for the decline were a Moody's report on Monday which said banks in the United Arab Emirates may have an exposure of $15 billion to Dubai World and the absence of clarity on the conglomerate's debt restructuring.
"I think, for equity investors, Moody's saying banks may take a 40 percent haircut is not good news. Our calculations show almost two years of profits may get wiped out if that is the case," said Robert McKinnon, chief investment officer at ASAS Capital in Dubai.
Dubai's index dropped 2.2 percent, falling for the fourth straight session, led by Emirates NBD which dropped 5 percent and developer Union Properties which touched an all-time low after falling 6.1 percent.
Investor sentiment toward Saudi Arabia, however, remained positive, despite the day's drop, with analysts saying a correction was overdue.
The Tadawul All-Share Index (TASI) fell 0.24 percent to 6,471.84, after nine straight sessions of gains, as market heavyweight Saudi Basic Industries Corp. (SABIC) dropped 0.8 percent.
The sector activity was negative with 12 sectors closing in the a negative as compared to only 3 sectors closing with positive gains. The sector losses ranged from 0.23 percent by the Industrial Investment to 0.97 percent by the Hotel & Tourism and the sector gains were 0.22 percent, 0.39 percent and 0.40 percent by the Banks & Financial Services, Energy & Utilities and Building & Construction respectively. The overall market breadth was strongly negative with only 35 advancers as against 89 decliners giving an AD ratio of 0.39, the Jeddah-based Financial Transaction House (FTH) said in its daily market commentary.
Abu Dhabi's index eased 0.1 percent to 2,750 points.
Qatar's index declined for a second straight session, falling 1 percent to 6,885 points, hurt mainly by Doha Bank, which fell 9.3 percent after paying a cash dividend of 5 Qatari riyals ($1.37) a share.
Kuwait's measure closed down 0.5 percent to 7,401 points as Zain's shares, the main driver behind the index's recent surge, closed flat.
Oman was the only index in the region which ended in positive territory. The measure rose 0.2 percent to 6,744 points helped by a 2 percent gain in Bank Sohar's shares. Bahrain's index fell 0.5 percent on very low volumes.
Egypt's main index closed 2 percent lower for its fifth straight decline, but traders said they expected buying appetite to return as valuations become attractive.
- With input from agencies
