Two exchanges have been discussing a merger since at least 2010, but talks appear to have moved escalated in recent months
Dubai's exchange extended gains on Sunday as bets on the country's two bourses merging boosted sentiment, while banks' dividends helped lift Saudi Arabia in a mixed regional trend.
Dubai's measure climbed 2.2 percent, up for a second session, to reach its highest close in five years.
The chief executive of the Abu Dhabi Securities Exchange (ADX) said on Sunday that stock markets in the United Arab Emirates should unify their back office operations and processes for settlement and regulation.
The two exchanges have been discussing a merger since at least 2010, but talks appear to have advanced considerably in recent months.
Last year Abu Dhabi and Dubai hired banks to advise on the possible merger, which would be one of the biggest reforms in the UAE's financial industry in recent years.
The price of DFM's stock rose 7.4 per cent on Sunday to 3.30 dirhams, its highest since September 2008.
"We can see that the market has priced in the DFM merger, especially in the DFM stock itself, which broke the resistance level of 3.30 dirhams ($0.90)," said Hisham Khairy, head of trading on the institutional desk at MENA Corp.
"The larger market will continue to test the resistance levels, but we have to wait and see how the stock will perform tomorrow in order to confirm the break and prove it has the strength to continue its climb."
Property firm Deyaar Development led trading, rising 8.1 per cent to a three-week high after its board recommended loosening share ownership restrictions to allow non-Gulf nationals to hold up to 25 per cent of its shares.
Deyaar also said its capital was "appropriate in light of its future plans for growth and expansion," following last week's statement that it would discuss capital restructuring and reduction.
Abu Dhabi's bourse was little changed, trading in a tight range since Monday's 66-month high.
In Saudi Arabia, the index gained 0.5 percent, up for a third consecutive session and reaching its highest level since August 2008.
Heavyweight sectors of banking and petrochemical were the main support.
Al Rajhi Bank climbed 0.7 per cent after the Capital Market Authority approved the lender's plan to increase its capital by 8 per cent through a bonus share issue.
Riyad Bank gained 0.5 percent, up almost 10 per cent since Jan. 30 when it proposed to double its capital by giving one bonus share for each held.
Samba Financial Group last month proposed one bonus share for every three held and has gained 5.9 per cent since. It added 1.9 per cent on Sunday.
"There is a dividend play, investors are taking note of that and going into blue chips," said John Sfakianakis, chief investment strategist at Saudi investment firm MASIC. "There is also a fresh inflow of money, which is giving (the market) momentum."
Dividends, rather than earnings, have played a bigger role in boosting blue-chip stocks this year.
Petrochemical sector index rose 1.0 percent.
Elsewhere, Qatar's index rose 0.3 percent, up for seven consecutive sessions to close at its highest level since August 2008.
Institutional investors have become more bullish on Qatar's market as the country hikes infrastructure spending ahead of hosting the FIFA World Cup 2022, according to Reuters' January survey of fund managers.
Shares in Commercial Bank of Qatar and Barwa Real Estate rose 3.2 and 3.1 per cent respectively.