* AWS expects recovery to be prolonged due to physical

damage

* UAE and Bahrain facilities face power, connectivity

outages

* Operating environment in Middle East unpredictable, AWS

says

(Rewrites, adding AWS comment on recovery timeline)

By Shubham Kalia, Aditya Soni and Mrinmay Dey

March 2 (Reuters) - Amazon ( AMZN ) said on Monday some

of its data centers in the United Arab Emirates and Bahrain were

damaged by drone strikes in the Middle East conflict, disrupting

cloud services and making a recovery "prolonged".

Iran fired a barrage of drones and missiles at Gulf States

in retaliation for U.S. and Israeli strikes that killed Supreme

Leader Ayatollah Ali Khamenei on Saturday.

A strike on the UAE facility marks the first time a major

U.S. tech company's data center has been disrupted by military

action. It raises questions around Big Tech's pace of expansion

in the region.

"In the UAE, two of our facilities were directly struck,

while in Bahrain, a drone strike in close proximity to one of

our facilities caused physical impact to our infrastructure,"

Amazon's ( AMZN ) cloud unit Amazon Web Services (AWS) said in an update

on its status page.

"These strikes have caused structural damage, disrupted

power delivery to our infrastructure, and in some cases required

fire suppression activities that resulted in additional water

damage," AWS said.

"We are working to restore full service availability as

quickly as possible, though we expect recovery to be prolonged

given the nature of the physical damage involved," it added.

AWS had previously said "objects" had triggered a fire on

Sunday that forced authorities to eventually cut power to a

cluster of Amazon ( AMZN ) data centers in the UAE, with restoration

expected to take at least a day.

Financial institutions that use AWS services have been

affected by the outage, one person with direct knowledge of the

situation told Reuters, requesting anonymity because of the

sensitivity of the matter.

"Even as we work to restore these facilities, the ongoing

conflict in the region means that the broader operating

environment in the Middle East remains unpredictable," AWS said.

REGIONAL AI HUB

U.S. tech giants have been positioning the UAE as a regional

hub for artificial intelligence computing needed to power

services such as ChatGPT. Microsoft ( MSFT ) said in November it

plans to bring its total investment in the UAE to $15 billion by

the end of 2029 and will use Nvidia ( NVDA ) chips for its data

centers there.

"In previous conflicts, regional adversaries such as Iran

and its proxies targeted pipelines, refineries, and oil fields

in Gulf partner states. In the compute era, these actors could

also target data centers, energy infrastructure supporting

compute, and fiber chokepoints," Washington-based think tank

Center for Strategic and International Studies said last week.

Microsoft ( MSFT ) as well as Google and Oracle - which also

operate facilities in the UAE - did not immediately respond to

Reuters' requests for comment.

The AWS outage disrupted a dozen core cloud services and the

company advised customers to back up critical data and shift

operations to servers in unaffected AWS regions.

Abu Dhabi Commercial Bank said its platforms and

mobile app were unavailable due to a region-wide IT disruption,

although it did not directly link the outage to the AWS

incident.