An investor gestures as he monitors a screen displaying stock information in Riyadh, Saudi Arabia, November 6, 2017.

Saudi Arabian stocks dropped sharply on Tuesday as banking and petrochemical shares weakened, while builder Arabtec Holding posted its sharpest single-day rise in two and half years after announcing a potential merger, helping to lift the Dubai index.

Saudi's index was down 1.1%. Al Rajhi Bank dropped 2% and petrochemical maker Saudi Basic Industries shed 2.8%.

Saudi Enaya Cooperative Insurance lost 4.9% after its accumulated losses reached 40% of its capital.

Real estate firm Arriyadh Development and gym network operator Leejam Sports shed 3.3% and 2% respectively as the stocks traded ex-dividend.

Tuesday's losses have left the index trading at meagre gains of 1.5% for the year. It jumped as much as 20% in May, led by foreign investors who have been net buyers every month this year as Saudi stocks joined the MSCI and FTSE Russell emerging market indexes.

The market remains under pressure with the kingdom's economy at risk of contraction and Middle East funds planning to reduce investment in Saudi Arabia.

In Dubai, the index rose 0.4%, with its largest listed developer Emaar Properties gaining 0.6%.

Arabtec Holding soared 11.3%, its biggest single-day gain since February 2017. The firm said on Tuesday it had begun a review to explore the possibility of merging its construction business with Abu Dhabi's private rival Trojan Holding.

The builder's shares traded at 1.77 dirhams, down from 28.73 dirhams at their mid-2014 peak when property prices began to head downwards.

Dubai property prices have tumbled 25-35% since mid-2014, and are expected to decline further this year and next amid a slowing economy and an oversupply of housing units.

The Abu Dhabi index was up 0.4% with Aldar properties adding 1.8%. The firm this week said it was launching a residential project on Saadiyat island that would be open to all nationalities.

This is the first development on Saadiyat island since April, when Abu Dhabi amended its real estate law to allow all foreigners to own land and property in investment areas on a freehold basis.

Qatar's index traded 0.7% higher lifted by gains in financials with Qatar National Bank adding 1.2%.

Egypt's blue-chip index closed 0.5% higher after its inflation rate declined to 7.5% in August, the lowest in years as the country approaches the end of International Monetary Fund-backed economic reform programme that during 2017 saw inflation rise to a high of 33%.

The inflation data clears the way for further rate cuts when the central bank meets later this month after having delivered a rate cut in August.

SAUDI ARABIA The index fell 1.1% to 7,965 points ABU DHABI The index was up 0.4% to 5,096 points DUBAI The index rose 0.4% to 2,892 points QATAR The index was up 0.7% to 10,376 points EGYPT The index was up 0.5% to 14,956 points OMAN The index was up 0.3% to 3,998 points KUWAIT The index edged up 0.1% to 6,424 points Bahrain The market was closed for a public holiday

(Reporting by Shakeel Ahmad in Bengaluru, editing by Ed Osmond) ((shakeel.ahmad@thomsonreuters.com))

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