In order to keep the lender afloat and to safeguard its holdings, the government announced it is to take full control of the institution's operations.
Capital is to be injected into Dubai Bank - a move that is expected to dilute shareholders and pave the way for a complete takeover.
The Dubai government said: "The intervention is designed to ensure that Dubai Bank's business continues uninterrupted while options for the bank's future ... are being assessed."
It explained the lender could either be operated on a stand-alone basis or be merged with another bank that is owned by the government.
Prior to the announcement, 70 per cent of Dubai Bank was owned by Dubai Holding, while the other 30 per cent belonged to Emaar Properties.
Recent data compiled by Bloomberg found Singapore's Oversea-Chinese Banking Corporation to be the strongest bank in the world at the moment.
By Claire Archer