MIDEAST STOCKS-Most Gulf markets drop after U.S. slaps new sanctions on Iran

June 25 (Reuters) - Major Middle East stock markets mostly fell on Tuesday after the United States imposed sanctions on Iran's leadership, a move Tehran said closed the door to diplomacy.

U.S. President Donald Trump targeted Iranian Supreme Leader Ayatollah Ali Khamenei and other top Iranian officials with sanctions on Monday, taking a dramatic, unprecedented step to increase pressure on Iran after Tehran downed an unmanned American drone.

Iran said on Tuesday that U.S. sanctions imposed on Supreme Leader Ayatollah Ali Khamenei and other top officials in the country permanently closed the path to diplomacy between Tehran and Washington.

Saudi Arabia's share index was down 0.2% in early traded, dropping for a fifth straight session. Banks were the biggest drag on the index, with the biggest lender, National Commercial Bank, falling 1.3% and Banque Saudi Fransi down 1.8%.

"Now that the big chunk of the passive flows (from Saudi Arabia's addition to the MSCI emerging markets index in May) is behind us, it is not surprising that Saudi Arabia is seeing the much-required correction. Geopolitical tensions are also yet to be priced in," said Vrajesh Bhandari, senior portfolio manager at Al Mal Capital.

"However, there should be support not far below as we expect demand to kick in again in anticipation of the second tranche of MSCI in August. Focus should soon shift away from the index inclusion theme to pure stock picking," Bhandari said.

The Abu Dhabi index traded 0.8% lower, weighed down by a 1.3% drop in Emirates Telecommunications Group and a 0.8% decline in the country's major lender First Abu Dhabi Bank.

In Dubai, the index was also down 0.2%, with blue chip developer Emaar Properties dropping 0.9% and its unit Emaar Malls slipping 1%.

Qatar's index was up 0.3%, however, bolstered by its blue chip banks. The region's biggest lender Qatar National Bank rose 1.2% while Qatar Islamic Bank climbed 1%. Banks in Qatar split their stocks earlier this month.

A 10-to-one stock split for companies on the exchange is being phased in from June 9, in a bid to boost liquidity by encouraging smaller investors to buy shares. (Reporting by Shakeel Ahmad in Bengaluru; Editing by Susan Fenton)