(Adds bond values, details)
DUBAI, Jan 6 (Reuters) - The cost of insuring against a potential debt default by Saudi Arabia has soared by a sixth since the killing by a U.S. drone on Friday of Iranian commander Qassem Soleimani, bearing the brunt of a broader reaction in Middle Eastern markets.
Conventional spreads on five-year Saudi credit default swaps (CDS) were at 64 basis points early on Monday, up from 55 bps on Jan. 2, according to IHS Markit.
That jump was slightly higher than in September last year after an attack on Saudi Arabia's oil facilities that in its initial phases halved oil production in the kingdom, which is Iran's arch enemy in the region.
The U.S. strike at Baghdad airport last Friday was seen by Tehran as an act of war and Iranian commanders have issued a range of retaliation threats since, although they have not offered any specifics about how they will respond.
International bonds issued by Saudi Arabia and its state oil giant Aramco were yielding around 10 basis points more on the long end of the curve when compared to their levels before the strike.
The debt securities due in 2049 were shedding around 0.3 cents in early trade on Monday.
Fallout from the drone strike was also evident in other Gulf debt markets, though generally far less marked, with Dubai's corresponding CDS only 1 basis point higher and Abu Dhabi's CDS spreads increasing to 37 bps from 34 last week.
A Dubai-based debt banker said any potential plan by regional borrowers to issue new paper would likely be delayed amid market volatility.
"A lot of foreign investors are headline-driven so theyll be reluctant to touch the region while things are so tense," he said, declining to be named.
Saudi Arabia had previously said it was looking to issue new U.S. dollar-denominated debt - needed for budgetary purposes - early this year.
"The greater the escalation, the greater the Gulf Arab states' need for funds, the greater the demand for debt but also the higher the price for new borrowing," said Firas Modad, Middle East and North Africa director at IHS Markit.
Regional stock markets were mixed after taking a beating on Sunday. Saudi Aramco's shares however kept shedding value on Monday, down 1.2% at 34.15 riyals at 0825 GMT, after hitting an intraday low of 34.05 riyals - the lowest level since they began trading on Dec 11. (Reporting by Davide Barbuscia and Saeed Azhar; editing by John Stonestreet)