Dubai's benchmark closes at a 20-week low; Qatar's index falls to a six-week low
Saudi Arabia's index was the only regional bourse to end higher, recovering from a 5-month low on Saturday, as most Gulf Arab stocks tumbled due to the U.S. rating downgrade.
The index edged up 0.08 percent ending at 6,078 points as bargain hunters stepped in to pick up battered stocks.
"Until we find out how the downgrade affects Saudi financial market, there's going to be a lot of trepidation in Saudi," said a Riyadh-based fund manager who asked not to be identified.
"After the king's benefits plan, the only way Saudi would not go into deficit is if oil stayed above $90. There are a lot of questions on whether Saudi will continue the development plan."
Saudi Arabia's king unveiled $93bn in social handouts in March, aimed at insulating the kingdom from regional unrest. Saudi Arabia also has a five-year, $400bn infrastructure development plan that runs to 2013.
Heavyweight Saudi Basic Induistries Corp dropped 0.3 percent and Al Rajhi Bank gained 1.1 percent.
Bourses in the UAE and Qatar fell to multi-month lows, rattled by a US rating downgrade which sparked worries the global economy may retreat into recession.
Dubai's benchmark closed at a 20-week low, slumping 3.7 percent to 1,484 points in its largest daily decline since February 28 at the height of regional political unrest.
Bluechip Emaar Properties ended down 5.3 percent, Arabtec sagged 6.3 percent and Dubai Financial Market closed off 5 percent.
"The global story is looking increasingly less optimistic, and at the same time you have equity markets here that have been relatively less volatile for a considerable stretch," said Akram Annous, Dubai-based MENA strategist at Al Mal Capital.
"That's probably going to start to change now, and I think the majority of the risk is in Saudi Arabia and Qatar's markets because they are more leveraged to the [emerging market] growth story."
In Qatar, the index fell to a six-week low, down 2.5 percent at 8,277 points. Shares recovered some of early session losses but still ended at a June 27 low.
Abu Dhabi's measure ended 2.5 percent lower at 2,603 points, a May 26 low. Heavyweights tumbled with First Gulf Bank closing down 5.9 percent while Abu Dhabi Commercial Bank ended 4.5 percent lower.
Investors in the world's largest oil exporting region - where all but one Gulf Arab state is pegged to the US dollar - are worried about the fallout from a weaker greenback.
"Our currencies will also depreciate, which could be inflationary for the region and impact negatively on sentiment," said Shahid Hameed, Global Investment House head of asset management for the Gulf region.
Elsewhere, Kuwait's index closed down 1.6 percent to 5,968 points at a fresh seven-year ebb, its lowest close since September 2004.
Bahrain's index ended 0.33 percent lower at 1,277 points.
Oman's shares ended at a new two-year low, as investors worry about the fallout of US debt woes that led to a credit ratings cut.
The benchmark fell 1.9 percept to 5,651 points, its lowest close since mid-July 2009.
"Apart from the downgrade, oil prices are going down sharply, that will also have a negative impact on Gulf markets," said Shahid Hameed, Global Investment House's head of asset management for the Gulf region. "Additionally, Europe's debt woes continue to get worse."
Heavyweight Bank Muscat dropped 4.2 percent, Bank Dhofar slipped 2.2 percent and Nawras dropped 3 percent. The index had no gainers.
"In the immediate term, [I expect a] 5-8 percent drop in this week and then markets could move sideways. I don't see any catalyst in the medium term. It will also depend on how markets open internationally tomorrow," said Hameed.
Concerns are high that the US economy may slide back into recession as it grapples with a climbing debt burden and a budget deficit.
The S&P cut the US long-term credit rating by a notch to AA-plus and changed it's outlook to "negative", signalling a likelihood or a further downgrade.
Saudi Arabia's shares lifted after hitting a five-month low on Saturday as the market reacted to S&P's ratings downgrade of the US.
The kingdom's benchmark, the most closely linked to the American economy, rose 0.4 percent to 6,112 points.
"Saudi foreign asset levels are at record highs, most in US treasury bills. The US downgrade affects us the most in the region, we don't know how the yields are going to play out," said a Riyadh-based fund manager who asked not to be identified.
Bellwether Saudi Basic Industries Corp (SABIC) gained 0.5 percent, Saudi Arabian Fertilisers Co (Safco) rose 1.8 percent.
Banks, however, extended losses with Samba Financial Group and SAAB shedding 0.7 percent each.
"Today is a stemming of the bleeding, but things are still unknown. There are a lot of questions, on how the downgrade could affect the Saudi development plan," he added.