Dubai, the second-largest of seven sheikhdoms in the United Arab Emirates, has stopped supplying gasoline to its neighbors as subsidies on fuel prices squeeze the city’s ability to service and repay debt.

Emirates National Oil Co., a Dubai government-owned refiner and operator of service stations, closed filling points in neighboring Sharjah and restricted supplies to other northern emirates last week. Dubai has $16 billion of publicly held debt maturing later this year, International Monetary Fund data show. The emirate plans to cut “subsidies and transfers” by 50 percent to 2.67 billion dirhams in 2011 from a year ago, according to a government forecast.

“Below-market retail prices – without a way to make up the losses – is an unsustainable situation,” said Rachel Ziemba, a Middle East analyst at Roubini Global Economics LLC in London. “The Dubai government continues to be cash-strapped, and this is one of the reminders that just because its companies are restructuring, it doesn’t mean that Dubai Inc. is out of the woods yet.”

Dubai borrowed at least $129 billion to turn itself into a tourism, trade and financial services hub, according to Credit Suisse Group AG. It had to seek help from neighboring Abu Dhabi after the global credit crunch dragged property prices down by more than half from their peak in 2008 and forced some state-owned companies to seek changes to payments.

The yield on Dubai’s 7.75 percent dollar bond maturing October 2020 climbed 16 basis points this month to 7.02 percent Monday, according to prices on Bloomberg.

Last week’s move came after authorities in the federal capital Abu Dhabi, wary of stoking discontent amid popular uprisings in the Middle East this year, refused to let gasoline retailers raise prices. ENOC said last month it may have to spend 2.7 billion dirhams ($740 million) this year to cover the cost of selling gasoline and diesel at prices below the market. Oil prices have risen to their highest since peaking in 2008.

Gulf monarchies have boosted social spending this year in the hope of staving off the unrest that toppled regimes in Tunisia and Egypt and led to armed conflict in Libya. Oil prices averaged $94.60 a barrel in the first quarter compared with $78.88 in the same period last year and $43.32 in 2009. Crude in New York hit a 2-1/2 year high of $114.83 last month.

“International oil prices have been increasing and so has domestic consumption, hurting ENOC’s cash-flow, yet Abu Dhabi refuses to lower subsidies,” said Thad Malesa, an independent energy analyst based in Dubai. “There have been no price increases in the Gulf since the Mideast protests began, as governments want no cause for similar opposition at home.”

The UAE federal government fixes retail prices for gasoline and diesel at prices that are below retailers’ costs. It has left prices unchanged this year even as crude rises to 2-1/2 year highs. Last year, the government allowed two increases in pump prices.

Regular gasoline now sells nationwide in the UAE for 1.72 dirhams, or 47 cents, a liter, or $1.88 a gallon. By comparison, the average price is $3.65 a gallon in the U.S. as of June 20, according to the Energy Information Administration. Saudi Arabia, the world’s biggest oil exporter, charges 17 cents a liter at the pump.

Fuel in Abu Dhabi, the largest of the country’s seven emirates, is sold exclusively by state-owned Abu Dhabi National, known as Adnoc. Abu Dhabi holds more than 90 percent of the UAE’s oil reserves and refines and sells its own crude. Adnoc can offset losses at home by selling crude in other countries, while ENOC must buy fuel at international market prices and sell it locally at a loss.

The extra yield investors demand to hold Dubai’s 10-year bond over Abu Dhabi’s 6.75 percent bond maturing in April 2019 widened nine basis points from a record low on June 2, to 296 Monday, according to Bloomberg data.