Some major securities, including the construction and banking shares, fell to almost the 10 per cent maximum allowed.
Dubai World, the emirate's investment arm, announced on Wednesday that it would seek a six-month freeze on debt repayments of almost $60 billion, prompting concerns about its economic health.
'Worrying signs'
Al Jazeera's Dan Nolan, reporting from Dubai, said: "It has been a bad day here. The main bourse dropped 5.6 per cent instantly.
"Analysts said before they opened that anything more than a three per cent drop would be a disaster.
"But others are pleased that it is not the full 10 per cent drop, which was certainly possible.
"Selling orders are far outnumbering buying orders and that is of great concern.
"It is certainly worrying signs at the stock market.
"There are concerns that there will be another large decrease on the stock market tomorrow. But hopes are that it will increase next week."
Abu Dhabi hit
Shares in the Abu Dhabi Securities Exchange, another of the UAE's seven emirates, dropped by 7.4 per cent early on Monday, due to Dubai's debt crisis.
Abu Dhabi, the oil-rich capital of the UAE, said on Sunday that would shore up Dubai's finances on a case-by-case basis, while the UAE said that it would offer emergency support to the region's banks.
Abu Dhabi has already provided $15 billion in assistance to Dubai this year.
Nakheel said that it wanted to halt trading in its three Islamic bonds, or sukuk, until it can provide the market with a complete picture of its restructuring plans.
The bonds are worth $5.25 billion.
Asian markets rose on Monday between 1.7 and 2.7 per cent on average, with bank and construction shares, big losers last week, leading the turnaround.
Global stock markets had taken a nosedive last Friday, triggered by news of Dubai's request for a debt repayment freeze.
However, Monday's tentative recovery came as investors' nerves steadied on hopes that the fallout from a potential default will be limited.
Francis Lun, general manager of Fullbright Securities in Hong Kong, told Al Jazeera: "A lot of Chinese companies are major contractors in the Middle East.
"Now that a crisis has hit Dubai World, I think that many of these construction companies will have to wind up their operations in the Middle East. So it will be a big hit for them."