Dubai's main share index fell 0.7%, weighed down by a 1.1% drop in Emirates NBD Bank and a 1% decline in sharia-compliant lender Dubai Islamic Bank.
"The Saudi announcement will likely negatively affect companies in the Emirates in the short-term," said Daniel Takieddine, market analyst at FXPrimus.
The Government of Dubai's ability to fulfil its financial obligations reflects its deep fiscal stability amidst the circumstances imposed by the current global crisis.
The $500 million notes, which were issued in 2011, have been redeemed in full, said the government.