Wed Aug 22, 2007 NEW YORK (Reuters) - Dubai World said on Wednesday it will invest up to $5.2 billion in MGM Mirage (MGM.N: Quote, Profile , Research), making the investment holding firm of the Dubai government a major player in Las Vegas, the biggest gambling destination in the United States.

MGM shares jumped 10 percent, or $7.46, to $81.78 in early trading on the New York Stock Exchange. MGM's 7.5 percent bond due 2016 rose 2.6 cents on the dollar to 99.75 cents, according to MarketAxess.

Dubai World said it will buy a 9.5 percent stake in MGM for about $2.4 billion. It will also invest about $2.7 billion to acquire a 50 percent stake in MGM's CityCenter project, a $7.4 billion, 76-acre Las Vegas development of hotels, condos and retail outlets due to open in 2009. Dubai World will pay MGM Mirage an additional $100 million if the project opens on time and on budget.

The investment firm will buy 14.2 million shares from MGM Mirage at $84 each, a premium of about 13 percent over Tuesday's closing price.

The firm will also issue a public tender for an additional 14.2 million shares at the same price. The public tender is due to begin during the week of August 27.

"This transaction is a transforming event for MGM Mirage and Las Vegas," MGM Chief Executive Terry Lanni said in a statement. Dubai World's investment "will greatly increase our growth and earnings," he added

The holding of Kirk Kerkorian's investment firm Tracinda Corp in MGM will be diluted somewhat, but not below 50 percent, under the deal.

The stake purchase by Dubai World, which referred to the partnership with MGM as a "long-term strategic relationship," will likely quell takeover talk surrounding the world's second-largest casino company.

Tracinda, MGM's majority shareholder, in May said it planned to buy MGM's Bellagio and CityCenter projects and would explore alternatives for its 56 percent stake in MGM.

Kerkorian, however, backed off the plan in June after MGM agreed to develop a new multibillion-dollar resort on property it owns on the north end of the Las Vegas Strip. The project is to be financed by partner Kerzner International Holdings Ltd., which owns the mammoth Atlantic resort in the Bahamas.

Ahead of the Dubai deal, Kerkorian's moves had sparked an 18 percent rise in MGM's shares.

Dubai World manages a range of businesses for the government of the Gulf Arab emirate including property developer Nakheel, which is developing palm-tree shaped islands off Dubai's coast.

Dubai World's Istithmar investment unit this month beat rivals with a $942.3 million bid to buy luxury clothing store Barneys New York from Jones Apparel Group Inc (JNY.N: Quote, Profile , Research).

Dubai World also owns DP World, the third-largest global container port handler that last year bought Britain's P&O for $6.8 billion.