By Doris Frankel and Ellis Mnyandu

CHICAGO/NEW YORK , Nov 27 (Reuters) - The Chicago Board Options Exchange Volatility Index, Wall Street's favorite yardstick of investor sentiment, notched its biggest one-day percentage gain in nearly a month on Friday as investors worried about fallout from Dubai's debt woes.
Concerns that there could be a debt default at a Dubai state-owned conglomerate brought back anxiety for stock investors who have had a relatively buoyant outlook since the broader market hit bottom in early March.
The so-called VIX closed up 20.8 percent at 24.74, just two days after it nearly broke below the 20 level as it plumbed its lowest levels since August 2008, right before the collapse of Wall Street firm Lehman Brothers.
The VIX is a 30-day risk forecast priced off Standard & Poor's 500 index option prices and generally moves up when investors seek options to guard their portfolios against uncertainty as stocks fall sharply.
The VIX jumped to a session high of almost 26 heading into December, repeating an almost similar pattern when it posted its biggest one-day percentage gain of 23.95 on Oct. 30.
Its surge coincided with a drop on Wall Street, with major equities indexes down more than 1 percent in an abbreviated post-Thanksgiving Day holiday session.
"Investors have taken some protection ahead of the weekend in case the market decline continues on Monday when the trading desks at firms are back at full staff," said WhatsTrading.com options strategist Frederic Ruffy said.
U.S. financial markets on Thursday were closed for the Thanksgiving holiday, giving the market a day to digest the information about the risks associated with a potential Dubai debt default, said Joe Kinahan, chief derivatives strategist at TD Ameritrade.
On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt. For details, see.
"Investors are bidding up options but not to ridiculous levels," Kinahan said. "We are going into a weekend where we know news is pending but the expectation is not as dire as first thought."
The market has taken a wait and see attitude rather than going into a panic mode, Kinahan said.
In volatility products, longer-dated VIX futures contracts have outpaced the spot VIX, a sign that traders expect additional volatility going forward.
December VIX futures ended at 24.05, slightly below spot VIX, while January futures stood at 27.15 with the rest of 2010 above a 28 reading, according to Reuters data.
(Editing by Chizu Nomiyama)

Keywords: MARKETS VIX (doris.frankel@thomsonreuters.com; +1 312 408 8752; Reuters Messaging: doris.frankel.reuters.com@reuters.net)

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