* Saudi institutions absorb heavy sales by retail investors
* Saudi riyal rebounds against dollar
* Qatar index hits highest level since May 2017
* Egypt blue-chip index rises sharply
* Dubai's Deyaar jumps in highest volume since January
By Abinaya Vijayaraghavan
Oct 16 (Reuters) - Saudi Arabian stocks plunged early on Tuesday on worries that the furore over the disappearance of dissident Jamal Khashoggi could damage foreign investment, but the market ended up after state-linked funds appeared to mount an operation to support it.
The Saudi index tumbled as much as 4.0 percent in early trade as local retail investors, who account for the vast majority of trading activity, dumped shares.
But the index closed 1.3 percent higher as state-linked funds came in to buy towards the close. Several regional fund managers said the buying was a deliberate effort to prop up the market, in the same way that funds supported stocks during a panic over a Saudi corruption investigation late last year.
Trading volume on Tuesday was the highest since April, suggesting the funds were obliged to buy heavily to prevent stocks from sliding.
Top petrochemical producer Saudi Basic Industries surged 4.9 percent. Saudi Telecom added 5.3 percent.
The Saudi riyal rebounded from a two-year low against the U.S. dollar on Tuesday after CNN reported Riyadh was preparing to acknowledge the death of Khashoggi in a botched interrogation. U.S. Secretary of State Mike Pompeo arrived in Riyadh on Tuesday to discuss the affair.
Blaming Khashoggi's case on mistakes by lower-level personnel would let the Saudi government say it never sanctioned his disappearance, and could help to reduce international outrage over the affair, a banker in the Gulf said.
Most other major Gulf markets rose. Qatar's index jumped 2.0 percent to 10,032 points, its highest since May 2017, testing technical resistance just above 10,000 points, where it peaked in August and September this year.
Blue chip Industries Qatar climbed 3.3 percent while several banks also fuelled the market's gains after they reported rising earnings.
Masraf Al Raya was up 1.9 percent after reporting a 4.4 percent increase in its net profit for the first nine months of the year, and Qatar International Islamic Bank added 2.5 percent after posting higher profits.
Egypt's blue-chip index was up 1.2 percent. Ibnsina Pharma jumped 7.3 percent and Juhayna Food Industries gained 5.9 percent.
Property firms Madinet Nasr, up 1.1 percent, and SODIC, down 5.3 percent, continued to move in opposite directions after SODIC proposed a merger of the two firms via a share swap that analysts said favoured Madinet holders.
Sarwa Capital, which had tumbled 15.1 percent in its debut on Monday, rebounded 4.0 percent.
The Dubai index rose 0.6 percent as real estate firms gained. Deyaar Development leapt nearly 10 percent in its highest volume since January, while Emaar Properties rose 1.9 percent. SAUDI ARABIA * The index gained 1.3 percent to 7,667 points. DUBAI * The index added 0.6 percent to 2,728 points. ABU DHABI * The index slipped 0.04 percent to 4,931 points. QATAR * The index rose 2.0 percent to 10,032 points. KUWAIT * The index shed 0.7 percent to 5,172 points. BAHRAIN * The index fell 0.3 percent to 1,312 points. OMAN * The index lost 0.2 percent to 4,452 points. EGYPT * The index rose 1.2 percent to 13,689 points. (Editing by Andrew Torchia/Mark Heinrich)