Fears that any tentative green shoots in the global economy could be trampled by a deadly outbreak of swine flu put markets on edge on Monday, after world policymakers said over the weekend that a recovery could begin later this year but plenty of downside risk remained.

The virus has killed more than 100 people in Mexico, and infections have been reported in the United States and Canada, with possible cases in Europe, Israel and New Zealand. The World Health Organization has declared the flu a public health emergency of international concern that could become a pandemic.

Oil dropped more than 2 percent toward $50 a barrel and Asian stocks headed lower on fears of a pandemic -- with drug stocks bucking the downward trend.

European shares were expected to also retreat, with nervousness about swine flu overshadowing robust gains by U.S. equities on Friday.

This will deepen the global recession and will probably have a contagion effect on export-led economies in Asia, said Daniel Chan, senior investment strategist at DBS Bank in Hong Kong. All sectors in the stock market may be affected except for health and drugs industries. The airline industry might be affected badly.

On Sunday, global finance and aid ministers warned at a meeting in Washington that the world's poor already faced a human catastrophe from the impact of the financial crisis.

Ministers from the 185 member countries of the World Bank and International Monetary Fund called on rich nations to accelerate aid to the developing world to prevent disaster.

We must continue to act in real time to prevent a human catastrophe, said World Bank President Robert Zoellick.

The World Bank said the global crisis had been a major setback to world poverty reduction. It said the crisis would push 53 million more people into extreme poverty in 2009, and cause 200,000-400,000 more infant deaths each year.

These numbers will rise if the crisis deepens and growth in developing countries falters further, it said.

Mexican Finance Minister Agustin Carstens said it was too early to judge the impact of swine flu on the country's economy.

This issue can have an important impact on the economy, although the most important impact is the one on human life and human well being, he said.

At this stage, without ignoring that this is a very serious matter and that it has a high potential for disruption, I would say it's too early to give a more concrete opinion.


The swine flu outbreak came just when more world policymakers were proclaiming the start of tentative economic recovery.

Six or eight weeks ago, there were no positive statistics to be found anywhere. The economy felt like it was falling vertically. Today, the picture is much more mixed, Lawrence Summers, economic adviser to U.S. President Barack Obama, said on Sunday.

I think that sense of unremitting freefall that we had a month or two ago is not present today. And that's something we can take some encouragement from.

The Group of Seven rich nations said on Friday that the world economy was showing early signs of recovery.

Economic activity should begin to recover later this year amid a continued weak outlook, and downside risks persist, G7 finance ministers and central bankers said in a joint statement.

Youssef Boutros-Ghali, who chair's the IMF's steering panel, said that things are beginning to look up.

Carefully, cautiously, we can say there is a break in the clouds, Boutros-Ghali said.

But the meeting appeared to make little progress on the thorny issue of giving emerging economies, particularly the BRIC countries -- Brazil, Russia, India and China -- a greater say in running the IMF. China and Brazil say if they are to contribute more money to the IMF, they want more influence.

The United States backed calls for more representation for emerging economies.

This is essential to strengthening the IMF's legitimacy, ensuring that it remains at the center of the international monetary system, said Treasury Secretary Tim Geithner. But several European nations opposed the move.

Although the G7 saw signs of recovery, many countries continue to cut their growth forecasts.

On Monday, Japan's government cut its forecast for GDP in the year to next March to a 3.3 fall from a previous estimate of zero growth.

(Reporting by Reuters correspondents worldwide; Writing by Andrew Marshall; Editing by Neil Fullick)