DUBAI, Dec 23 (Reuters) - Saudi shares recovered some ground on Sunday after a sell-off in the banking sector when lenders said they had reached a deal with Islamic tax authorities to resolve a dispute over increased liabilities that would still result in big one-off payments.
Sentiment across Gulf markets was hurt by the plunge in Wall Street stocks on Friday as the U.S. government shutdown weighed on global markets.
The Saudi index opened more than 2 percent lower. At 0731 GMT, it was trading 1.6 percent down. But by the close, the benchmark ended down by 0.3 percent.
Al Rajhi Bank, which declined as much as 5.7 percent in early trading, recovered, rising as much as 1.2 percent.
"Even if banks took the right provisions for the unsettled tax, it's a significant amount of cash leaving the banks’ balance sheets," said Tariq Qaqish, managing director for asset management at Menacorp Financial Services in Dubai.
"While M&A deals and higher interest rates that would improve net interest margins (banks profitability) were key reasons of the outperformance of banks shares versus the benchmark, we do (see) downward risk and natural investor shift within the sector," Qaqish said.
Saudi British Bank announced a settlement of 1.6 billion riyals ($426 million) with Saudi authorities, while Al Rajhi Bank said its settlement would cost 5.4 billion riyals.
Banks have been at loggerheads with the authorities since at least the start of the year over additional payments of Zakat - the name of the tax - for years going back as far as 2002.
Saudi Basic Industries, which is the largest company on the Saudi equities market, rose 0.2 percent, providing support to the market. Other stocks also rose, including telecom operator Zain Saudi Arabia, which rose 2.3 percent.
The Dubai Financial Market General Index was down 1.2 percent, dented by property stocks. Dubai's DAMAC Properties , owner and operator of the only Trump-branded golf club in the Middle East, was down 4.5 percent.
Dubai's biggest developer Emaar Properties was down 3.8 percent, while Union Properties down five percent.
World stock markets fell on Friday as further hikes in U.S borrowing costs impacted investor sentiment.
Sources told Reuters on Saturday that U.S. President Donald Trump had privately discussed the possibility of firing Federal Reserve Chairman Jerome Powell. Treasury Secretary Steven Mnuchin, however, tweeted late on Saturday that Trump had told him that he had "never suggested" dismissing Powell.
Abu Dhabi shares declined 0.8 percent on Sunday, weighed by energy stocks, after Brent crude fell 2.3 percent to $53.10 on Thursday.
Abu Dhabi National Energy Company, also known as Taqa, was down 9.5 percent.
Qatar's index was down 1.2 percent with blue-chip stocks such as Industries Qatar down over 2 percent.
In Qatar, Mazaya Qatar Real Estate Development rose 1.6 percent. The company on Thursday said it intends to study the possibility of merging with Al Bandari Real Estate Company.
In July, Mazaya Qatar said it decided not to proceed with the acquisition of a high rise office building, the Tornado Tower in the West Bay area of Doha. Shares of Mazaya Qatar are down 12 percent year to date.
Shares of Bank Dhofar rose on Sunday after Qatar's Commercial Bank, a major shareholder of National Bank of Oman, said it was not in support of National Bank of Oman's merger with Bank Dhofar.
Bank Dhofar's shares rose 3 percent, while National Bank of Oman's shares were unchanged.
Oman's benchmark was largely unchanged.
National Bank of Oman on Sunday said it will consider the interests of all shareholders in assessing the merits of a merger with Bank Dhofar.
"Well let us face it, the region is overbanked as a percentage of its population and requires more consolidation as a result of delicate macro outlook," said Menacorp's Qaqish.
The declines were also present in Egypt, as Telecom Egypt lost 3.9 percent and Commercial International Bank lost 3.4 percent. The EGX 30 Index was down 1.3 percent. SAUDI ARABIA * The index .TASI lost 0.3 percent to 7,731 points DUBAI * The index .DFMGI fell 1.2 percent to 2,479 points ABU DHABI * The index .ADI lost 0.8 percent to 4,817 points EGYPT * The index .EGX30 fell 1.3 percent to 12,964 points QATAR * The Index .QSI lost 0.8 percent to 10,333 points KUWAIT * The index .BKP lost 0.2 percent to 5,300 points BAHRAIN * The index .BAX was largely unchanged at 1,314 points OMAN * The index .MSI was largely unchanged at 4,336 points
$1 = 3.7519 riyals Reporting by Hadeel Al Sayegh; Editing by Hugh Lawson and Alison Williams