Several British banks said on Friday they had stopped dealing in Qatari riyals, as the diplomatic crisis surrounding the Gulf country disrupted overseas trading of its currency.

Saudi Arabia, the UAE, Bahrain and Egypt severed diplomatic and travel links with Qatar on June 5, accusing it of supporting terrorism.

Offshore trade of the riyal has become increasingly volatile and illiquid as a result, raising risks for banks.

A spokeswoman for Britain's Lloyds Banking Group said a "third-party supplier" which handles its foreign exchange service had ceased trading in Qatar's riyal as of June 21.

"This currency is no longer available for sale or buy-back across our high street banks including Lloyds Bank, Bank of Scotland and Halifax," she said.

Tesco Bank said it had halted dealings in the riyal, while Barclays stopped trading riyals for retail customers but continued the service for corporate customers, a source said. Royal Bank of Scotland said it had stopped trading riyals for retail customers.

Banks from the four Arab states that have cut ties with Qatar reduced or halted riyal transactions earlier this month, as have some other countries.

This week the riyal traded between offshore banks as low as 3.81 to the US dollar, its lowest level this decade and more than 4 per cent below its peg of 3.64 to the dollar.

The Arab states opposing Qatar have set a deadline of around Monday next week - officials have not publicly specified the exact time - for Doha to agree to demands such as shutting television channel Al Jazeera and reducing ties to Iran.

Publicly, Doha has shown little sign of complying, and the four states have said they could impose fresh sanctions if their demands are not met. This threat pushed the cost of insuring Qatari sovereign debt against default to a 16-month high on Friday.

A source at an investment manager in London, however, said intervention to drive the offshore riyal rate back to 3.64 could be dangerously expensive for the [Qatari] central bank.

"In a month, two months' time, we would start to see the reserves numbers going down massively, and that could start a panic on the currency." The alternative to intervention is "the currency grinds down weaker and weaker from here," he added.

Source: Khaleej Times