* U.S. rate rise could add to monetary squeeze in Gulf * Saudi stock index tests, holds technical support * UAE property stocks hit hard * Air Arabia tumbles after Q3 misses estimates * Egypt state banks struggle to support currency By Andrew Torchia DUBAI, Nov 8 The threat of a U.S. interest rate hike in December dragged down major Middle East stock markets on Sunday, illustrating how fragile investor sentiment in the region has become in the face of low oil prices. Short-term U.S. bond yields rose to their highest in five years on Friday after very strong U.S. jobs data for October boosted the likelihood that the Fed will raise rates before year's end. Money market rates have already been rising in the Gulf as liquidity shrinks because of lower oil revenues. Higher U.S. rates could intensify the simultaneous fiscal and monetary squeeze in the region. The Saudi stock index dropped as much as 1.9 percent during the day but closed 0.6 percent lower at 6,923 points, holding technical support at its August low of 6,921 points. It was the second test of that support since last week. Real estate developer Dar Al Arkan lost 0.8 percent. Saudi Printing and Packaging, which had begun tumbling on Thursday as a bubble in the stock burst, plunged a further 10 percent. Oil prices fell as much as 2 percent on Friday, with Brent ending below $48 a barrel. That hit petrochemical producers such as Saudi Basic Industries, which sank 1.5 percent. DUBAI, EGYPT The U.S. interest rate threat had the biggest impact on markets in the United Arab Emirates through real estate developers. The dirham's peg to the U.S. dollar could force the UAE central bank to raise rates, while appreciation of the dirham alongside the dollar may deter foreign buying of Dubai property by inflating prices. The Dubai stock index sank 3.0 percent as blue chip Emaar Properties slipped 4.7 percent and Deyaar Properties lost 5.6 percent. Air Arabia fell 5.2 percent after reporting a 6 percent drop in third-quarter net profit to 235 million dirhams ($64 million). Analysts had on average predicted 300 million dirhams. However, delivery firm Aramex gained 2.2 percent. It has been on an uptrend since Oct. 28, when its chief executive told Reuters that the company had several acquisitions in the pipeline and was expecting to close deals valued in range of $150 million in the next two quarters. Abu Dhabi's index lost 1.6 percent as Aldar Properties, the most heavily traded stock, dropped 5.8 percent. Qatar's index fell 1.9 percent with petrochemical producer Industries Qatar losing 2.9 percent and drilling rig provider Gulf International Services slipping 4.3 percent. Egypt's stock index sank 2.6 percent. With a big external deficit and low foreign exchange reserves, Egypt is ill-placed to withstand higher U.S. interest rates, which could hasten a currency devaluation that many think is inevitable. Egypt's two largest state banks have launched savings certificates for Egyptian pounds with an interest rate of 12.5 percent to support the currency, local media and bankers said on Sunday, increasing the likelihood of an Egyptian central bank rate hike next month. Property developer Palm Hills dropped 4.9 percent, giving up almost all of its 5.2 percent jump on Thursday, when it reported a better-than-expected third-quarter net profit of 182.02 million Egyptian pounds ($22.7 million) after minority interests versus 129.70 million pounds a year ago. SUNDAY'S HIGHLIGHTS SAUDI ARABIA * The index fell 0.6 percent to 6,923 points. DUBAI * The index tumbled 3.0 percent to 3,347 points. ABU DHABI * The index fell 1.6 percent to 4,194 points. QATAR * The index dropped 1.9 percent to 11,222 points. EGYPT * The index sank 2.6 percent to 7,347 points. KUWAIT * The index edged up 0.1 percent to 5,777 points. OMAN * The index edged down 0.05 percent to 5,915 points. BAHRAIN * The index fell 0.3 percent to 1,247 points. (Editing by Jon Boyle)