U.S. stocks fell on Monday on concerns the spreading of a new strain of flu could dampen optimism about the economy, overshadowing a sweeping overhaul of General Motors Corp and gains in biotechnology stocks.

The three major U.S. stock indexes slid in choppy trade as governments around the world moved to contain the spread of a swine flu outbreak that has killed up to 149 people in Mexico and spread to the United States and Canada.

The Amex Airline Index <.XAL> dropped 10.6 percent as investors worried that travel would be hit hard by the flu fears. Among the laggards, UAL Corp , the parent of United Airlines, plummeted 14.3 percent to $5.50, while Continental Airlines Inc lost 16.4 percent to $11.08.

Anxiety about the flu hammered the entire transport sector

and the Dow Jones Transportation Average <.DJT> sank 4.7 percent even as recent data has suggested the recession could be abating, and quarterly earnings have been less disappointing than Wall Street expected.

The market looks for things to worry about, particularly when you are up nearly 30 percent from the bottom, said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas.

The broad S&P 500 on Friday snapped a six-week streak of gains, although it is up 26.8 percent since hitting a 12-year closing low on March 9.

The Dow Jones industrial average <.DJI> fell 51.29 points, or 0.64 percent, to 8,025.00. The Standard & Poor's 500 Index <.SPX> dropped 8.72 points, or 1.01 percent, to 857.51. The Nasdaq Composite Index <.IXIC> shed 14.88 points, or 0.88 percent, to 1,679.41.

The blue-chip Dow average is up 22.6 percent from the bear-market closing low on March 9, but remains down 8.6 percent for the year.

However, the worries were tempered as GM shares surged 20 percent to $2.04 after the troubled automaker announced a restructuring that investors hope will keep the company alive as it tries to secure government funding.

After Monday's closing bell, S&P 500 stock futures added to losses in after-hours trading as a flu expert from the World Health Organization confirmed the pandemic alert level had been raised to Phase 4 from Phase 3.

On Nasdaq, cell-phone chip supplier Qualcomm Inc was a bright spot, up 4.4 percent at $43.17 after it swung to a quarterly loss, but raised its full-year revenue target on signs of market improvement.

Chevron Corp and Exxon Mobil Corp also weighed on the blue-chip Dow as June oil futures prices slid nearly 3 percent on flu worries. Chevron fell 1.8 percent to $65.41, and Exxon lost 0.7 percent to $66.13.

In contrast, stocks of drugmakers benefited from the threat of a flu pandemic triggered by the new swine flu strain. Gilead Sciences climbed 3.8 percent to $47.53 on Nasdaq. [ID:nLR144642] The Merrill Lynch Biotech Holders ETF rose 2.1 percent.

The CBOE Volatility Index <.VIX>, viewed as Wall Street's fear gauge, rose 4.1 percent to 38.32.

Skittishness over what a government stress test of 19 major U.S. financial institutions might reveal pressured financial stocks, with the KBW Bank index <.BKX> off 4.9 percent. Wells Fargo & Co fell 5.1 percent to $20.30 after influential analyst Richard Bove downgraded the bank's stock to hold from buy.

Also on the earnings front, Dow component Verizon Communications Inc , the No. 2 U.S. phone company, posted higher-than-expected profits, helped by its purchase of a smaller rival and growth in cell-phone customers. But Verizon's shares slipped 1.5 percent to $30.54.

Trading was moderate on the New York Stock Exchange, with about 1.40 billion shares changing hands, below last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.23 billion shares traded, below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,071 to 975 while on the Nasdaq, decliners beat advancers by

1,794 to 902.

(Editing by Jan Paschal)