(Updates with Saudi Arabia, Egypt open)
By Olzhas Auyezov
DUBAI, March 26 (Reuters) - Middle East stock markets fell sharply in early trade on Thursday after Saudi Arabia and allies launched air strikes in Yemen, edging towards a fresh proxy war with Iran. But the Saudi market came well off its lows after an initial plunge.
Saudi Arabia's main index tumbled more than 4 percent in the opening minutes of trade but quickly stabilised and was down only 1.8 percent after 15 minutes. On Wednesday, it lost 5.0 percent as preparations for the military strike became apparent.
Dubai's index, the most volatile in the region because of leverage and the dominance of short-term investors, tumbled 4.3 percent to 3,288 points in a broad sell-off. It dropped below technical support at the January low of 3,358 points, leaving no chart support before the December low of 2,993 points.
"Obviously, it creates uncertainty and markets don't like uncertainty," said Shakeel Sarwar, head of asset management at Securities & Investment Co in Bahrain.
But he added: "If the situation remains contained and does not spread out, the markets will stabilise or even rebound" within a few days.
Abu Dhabi's stock market fell 1.9 percent, while Qatar's bourse lost 1.6 percent. Benchmarks in Kuwait and Oman dropped 2.9 and 2.6 percent respectively.
Kuwait underperformed after Minister of Commerce and Industry Abdulmohsen al-Madaj resigned on Wednesday, becoming the second cabinet minister to quit this month after facing public criticism. His departure underlined political tensions that have slowed economic development of the country.
Egypt's market was down 2.6 percent after the Cairo government said it was providing political and military support for the Saudi-led operation in Yemen.
Warplanes attacked the Yemeni capital Sanaa's airport and its al Dulaimi military airbase on Thursday after the Houthi militia and its army allies advanced towards the city of Aden a day earlier.
Yemen's slide toward civil war has made the country a front in mostly Sunni Saudi Arabia's rivalry with Shi'ite Iran, which Riyadh accuses of stirring up sectarian strife throughout the region and in Yemen with its support for the Houthi militia.
The crisis now risks spiraling into a proxy war with Shi'ite Iran backing the Houthis, and Saudi Arabia and the other regional Sunni Muslim monarchies supporting Yemeni President Abd-Rabbu Mansour Hadi.
However, it is not clear that even major intervention in Yemen by Saudi Arabia and its allies would do significant long-term damage to their economies and markets, given Yemen's isolation, Gulf states' lack of economic exposure to Yemen, and governments' firm control over their domestic security.