DUBAI- Saudi stocks declined on Wednesday as investors cut risk ahead of a decision from global index compiler MSCI on whether to include Saudi Arabia and its $526 billion bourse in its emerging market indexes.

"It would not be surprising to see some profit taking in the Saudi market after a strong run up into the MSCI inclusion date," said Saleem Khokhar, head of equities at First Abu Dhabi Bank.

"Valuations of Saudi equities are at the higher end of historic ranges even though the medium-to-longer term underlying fundamentals for companies remain strong."

The main Saudi index shed 1.3 percent. Banks led the declines on the Riyadh bourse. MSCI is set to announce its decision Wednesday afternoon New York time.

Al Rajhi Bank lost 2.1 percent. Banque Saudi Fransi lost 4.3 percent, Riyad Bank 1010.SE lost 2.9 percent, and Saudi British Bank 1060.SE lost 4 percent.

The region's biggest stock market is up almost 13 percent so far this year and has outperformed Gulf markets in anticipation of the MSCI inclusion, which could trigger billions of dollars of inflows into Riyadh's Tadawul-listed stocks.

In Dubai, negative sentiment continued to weigh on local stocks after Dubai carrier Air Arabia AIRA.DU on Monday said it had an investment in private equity firm Abraaj's funds, the private equity group which last week filed an application for provisional liquidation.

Air Arabia said on Wednesday the exposure to Abraaj would have no material impact on its operations and liquidity. 

The Dubai Financial Market General Index .DFMGI was down 0.6 percent to 2,923 points. Dubai Islamic Bank, DISB.DU the emirate’s biggest shariah-compliant lender, declined 1.2 percent. Air Arabia, the budget airline, lost 0.9 percent.

"The rumours in the stock market surrounding the possibility of involvement or lending to Abraaj, especially through the banks, have been really affecting shares of banks since Monday,” said a stockbroker who declined to be named due to commercial sensitivities.

Abu Dhabi's index shed 0.3 percent with the United Arab Emirates' largest lender, First Abu Dhabi Bank (FAB) , falling 1.2 percent and property developer Aldar losing one percent.

In Qatar, the benchmark declined 2.4 percent, weighed down by lenders. Qatar National Bank QNBK.QA declined 4.4 percent, while Commercial Bank of Qatar lost 5.8 percent.

Outflows from emerging markets exchange traded funds weighed on the Qatari index amid withdrawals from those funds over the Eid holidays on concerns about a strong dollar, said Akber Khan, head of asset management at Al Rayan Investment in Doha.

SAUDI ARABIA * The index declined 1.3 percent to 8,166 points.

DUBAI * The index lost 0.6 percent to 2,923 points.

ABU DHABI * The index slipped 0.3 percent to 4,550 points.

QATAR * The index declined 2.4 percent to 8,882 points.

KUWAIT * The index gained 0.2 percent to 4,815 points.

BAHRAIN * The index declined 0.5 percent to 1,301 points.

OMAN * The index was mostly unchanged.

EGYPT * The index gained 0.5 percent to 16,143 points.

(Additional reporting by Marwa Rashad in Riyadh; Editing by Jon Boyle)