The move was the least expected of all options Dubai had on the table after requesting a standstill on $26 billion in Dubai World debt on November 25, alarming markets and shaking the image of the emirate as a regional business hub.
"The government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World," the chairman of the Dubai Supreme Fiscal Committee said in a statement.
"As a first action for the new fund, the government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today."
The yen fell sharply against other currencies on the news, while the dollar shot up to 88.90 yen and the euro also jumped to 130.43 yen.
S&P futures jumped to be up 0.7 percent, reversing early losses and pushing Treasury futures to session lows. Hong Kong's Hang Seng index shot up 300 points in the last minutes of morning trade to finish in positive territory, while other markets across Asia also pushed higher.
Abu Dhabi is the largest member of theand a big oil exporter.
"We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmed bin Saaed al-Maktoum said in the statement.
"Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come."
Excess funds would be used to cater to Dubai Worlds needs up until the end of April 2010, the statement said.
Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future.
"Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said.
"This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations."