The mounting debt in Dubai shook the world markets on Friday, leading the Dow Jones Industrial Average to close down 154 points and the Nikkei 225 to plummet 301 points. The situation has even been described by the Associated Press as a “debt crisis”.

Dubai wasn’t always in this situation; in fact, its future looked quite different just a year ago. It was to be home to magnificent buildings, gigantic theme parks, and even man-made islands in the shape of the world that would house the world’s richest people.

But things have taken a turn for the worst in recent months, as real estate prices plummet and the full scope of Dubai’s over-ambitious development plans have been realized. As the Associated Press reports:

In a surprise announcement Wednesday, Dubai said it seeks a six-month delay in paying creditors on nearly $60 billion in debt held by its main development arm, Dubai World, whose holdings range from port operations around the world, Dubai’s iconic palm-shaped island and the luxury retailer Barneys New York. The next tranche was a $3.52 billion bond due Dec. 14 by Dubai World’s troubled real estate division, Nakheel.

The debt crisis has been a major topic on global news networks since it was announced. And now attention is turning to white knights who may ride in to save the day.

One of those possible knights is Dubai’s neighbor and fellow Islamic nation Abu Dhabi, which remains flush with oil revenue and has already extended a $10 billion rescue package to its neighbor earlier this year. Back to the Associated Press:

It’s not known what promises were made inside the halls in Al Ain during the parade of visitors for an important Islamic feast day on Friday. But their new relationship is clear. Abu Dhabi has the cash and cache to be Dubai’s white knight — in a Gulf version of a too-big-to-fail bailout or to help calm markets with promises to intervene if Dubai’s fiscal mess deepens.

The direction Abu Dhabi takes will likely set the tone for the coming week as analysts try to sort out what banks and institutions have the most at stake in the money crunch — which has suddenly shifted Dubai’s image from a desert dream factory of indoor ski slopes and a “seven-star” hotel to a reckless spender sideswiped by the recession and unable to pay its bills.

The government of Abu Dhabi has been extremely defensive of Dubai as of late, with its ruler, Sheik Mohammed bin Rashid Al-Maktoum, literally telling critics to, “shut up”.

What’s in it for Abu Dhabi? What does its government gain by risking tens of billions of dollars on a country with no positive turn around in sight? Influence. Abu Dhabi would love to have influence over Dubai’s development policies, being able to reign in the out of control spending on investments with little return.

Incidentally, we don’t know how Middle Eastern markets will react to the news. They’re closed until Monday due to the Islamic holiday.