Nov. 26 (Bloomberg) -- European stocks plummeted the most in seven months amid concern Dubai’s proposal to delay debt payments may trigger the biggest sovereign default since Argentina in 2001.

London Stock Exchange Group Plc, whose largest shareholder is Borse Dubai Ltd., slumped the most since April. European Aeronautic, Defence & Space Co., which is also part-owned by the sheikhdom, fell 4.3 percent. Cie. de Saint-Gobain SA, Europe’s biggest supplier of building materials, sank 6.4 percent after Goldman Sachs Group Inc. recommended selling the shares.

The Dow Jones Stoxx 600 Index retreated 3.3 percent to 239.85, the steepest drop since April, as only 16 stocks in the gauge rose. The measure plunged 44 percent in the six months after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008 froze credit markets and worsened the first global recession since World War II. The VStoxx Index, which gauges the cost of using options to protect against declines in the Euro Stoxx 50, jumped the most in 13 months.

“The specter of financing difficulties is resurging,” said Alexandre Iatrides, a fund manager at KBL Richelieu in Paris, which oversees about $3 billion. The news from Dubai “is resurfacing worries that we had put aside. This could be the new Lehman.”

Borrowed $80 Billion

The cost of protecting government notes from Qatar to Saudi Arabia rose the most since June yesterday as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Dubai borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub. Credit-default swaps tied to debt sold by the sheikhdom rose as much as 131 basis points to 571 today, according to CMA DataVision.

National benchmark indexes declined in all of the 18 western European markets, except Iceland. The U.K.’s FTSE 100 sank 3.2 percent and Germany’s DAX fell 3.3 percent. Greece’s ASE Index plummeted 6.2 percent, the steepest drop in a year, as Marfin Investment Group SA slid.

The VStoxx surged 28 percent to 30.35, the steepest gain since October 2008.

Trading on the London Stock Exchange was halted for more than three hours today due to technical problems. The U.S. market was closed today for the Thanksgiving holiday.

LSE, Europe’s biggest exchange by value of listed companies, sank 7.4 percent to 754.5 pence, the steepest decline since April. Borse Dubai owns 21 percent of LSE shares, according to Bloomberg data.

EADS, Porsche

EADS, the parent of Airbus SAS, dropped 4.3 percent to 11.74 euros. Dubai International Capital, a private-equity fund owned by the emirate’s ruling sheikh, owns 3 percent of EADS, and “could be tempted” to sell those shares, Exane analyst Tristan Sanson wrote in a report. Dubai’s flagship airline, Emirates, is also the biggest customer for Airbus’s A380 aircraft and may choose to cancel or push back orders, he wrote.

Porsche SE, which is merging with Volkswagen AG, tumbled 5.1 percent to 46.59 euros and VW fell 6.2 percent to 81 euros. Qatar owns 10 percent of the voting rights in Porsche and will eventually hold 17 percent of the merged carmaker.

Separately, the maker of the 911 sports car was cut to “hold” from “buy” at UniCredit SpA and to “reduce” from “buy” at Equinet.

Marfin Investment, the investment fund backed by Dubai Financial LLC, plummeted 9.7 percent to 2.15 euros in Athens trading, the biggest drop in a year.

Prospects of Writedowns

Dubai World’s more than 70 creditors face the prospect of writedowns on as much as $60 billion of debt if they haven’t unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi. Lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation.

Credit Suisse fell 5.4 percent to 51.45 Swiss francs, HSBC slid 4.8 percent to 705.6 pence, Barclays plunged 8 percent to 291.1 pence, Lloyds sank 5.8 percent to 88.83 pence and RBS retreated 7.8 percent to 33 pence.

“Our exposure is immaterial,” said Credit Suisse spokesman Marc Dosch. HSBC and Lloyds declined to comment when contacted by Bloomberg. Spokesmen at RBS and Barclays were not immediately available to comment.

Saint-Gobain declined 6.4 percent to 35.80 euros. Goldman Sachs cut its recommendation on the shares to “sell” from “neutral,” saying “there is limited scope for earnings driven outperformance.”

Legal & General

Legal & General Group Plc sank 7.4 percent to 78.5 pence. The U.K.’s second-biggest insurer by assets was cut to “sell” from “hold” at Citigroup Inc., which cited “business model challenges.”

Severn Trent Plc, the U.K.’s second-largest water company, led gains in U.K. water utilities after industry regulator Ofwat said it would reduce household bills by less than previously estimated over the next five years. Severn Trent rose 3.8 percent to 1,044 pence and Northumbrian Water Group Plc climbed 2.8 percent to 263.1 pence.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

Last Updated: November 26, 2009 12:44 EST