Oil prices extended losses on Tuesday, falling about 2 percent toward $49 a barrel after a report that Citigroup and Bank of America may need to raise more capital, renewing worries about the financial sector.

A rising death toll from a flu outbreak is already fanning fears of a pandemic potentially hurting the world economy and air travel.

U.S. oil futures fell $1 to $49.14 a barrel by 0502 GMT, adding to Monday's losses of $1.41. London Brent crude was down $1.03 at $49.29.

Banking woes are adding to swine flu jitters, and both are seen trampling any recent talk of an economic recovery, said Michelle Kwek, an analyst at Informa Global Markets.

This is a double whammy and the news is throwing markets back into an overdrive of risk aversion.

U.S. regulators have told Citigroup Inc and Bank of America Corp they need to raise more capital following the results of recently concluded stress tests, the Wall Street Journal said, citing people familiar with the situation.

S&P futures extended losses on the report, while the U.S. dollar fell to the lowest in a month against the yen on risk aversion.

Worries about the potential economic fallout from the swine flu outbreak are also raising concerns about the impact on oil demand.

Swine flu, a new virus that contains avian and human components, has killed up to 149 people in Mexico and world health experts moved closer on Monday to declaring it the first flu pandemic in 40 years as more people were infected in the United States and Europe.

Reminiscent of the Asian bird flu earlier in the decade, a swine flu outbreak could be a major setback to the already fragile world economy.

The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product.

Oil prices have recovered from about $35 a barrel in February to hover around $50 for most of this month, tracking a rebound in equities markets.

But some analysts have cautioned that oil prices could pull back from current levels in the near term as demand remains weak and fundamentals do not support higher prices.

Oil looks set to fall if the market swings its attention to supply conditions. It still seems the glass is half-full when it comes to demand, Mark Pervan, head of commodities at Australia and New Zealand Bank, said in a research note.

Reflecting still-weak demand, U.S. crude stocks probably rose 2.2 million barrels last week, a preliminary Reuters poll showed.

The poll also forecast a 300,000 barrel decrease in gasoline stocks and a 300,000 barrel build in distillate stocks.

The weekly inventory report from American Petroleum Institute will be released later in the day.

The U.S. Federal Reserve will begin the first of a two-day policy meeting on Tuesday, while economic data due out later include U.S. retail sales and consumer confidence.

(Editing by Michael Urquhart)

Mexico Medicine