Oil prices fell 4 percent on Monday on worries a flu outbreak in Mexico could become a pandemic and hurt the global economy and air travel.

U.S. oil futures dropped $2.12 to $49.43 a barrel by 1:37 p.m. EDT, off an earlier low of $48.01. London Brent crude fell $1.98 to $49.69 a barrel.

Governments around the world rushed to reduce the impact of a possible flu pandemic on Monday as a virus that has killed 103 people in Mexico and spread to the United States and Canada also reached Europe.

The Mexican situation is resurrecting fears of the chilling impact that the SARS epidemic had on economic growth, said Edward Meir of broker MF Global in a research note.

The potential for a drop in jet fuel demand is also weighing on oil markets, Addison Armstrong, an analyst at Tradition Energy, said in a research note.

Airline shares were hit by expectations the flu outbreak could hurt air travel.

Gains in the dollar, a safe-haven in times of stress, also weighed on oil and other commodities which tend to fall when the U.S. currency rises.

TACTICAL SHORTS

Oil is down about $100 a barrel from a record peak in July last year of more than $147.

The global recession and shrinking oil demand had pushed prices toward $30 a barrel earlier this year. They have recovered to around $50 alongside an equity market rally.

Commodity prices and returns have risen substantially since mid-February lows, Goldman Sachs said in a research note. We believe markets will likely continue to pull back from current levels in the near term, as fundamentals are not yet stable enough to support higher prices, the bank said.

As a result, we have opened tactical shorts in both the oil and metals markets in recent days.

The Organization of the Petroleum Exporting Countries has agreed to cut supply by 4.2 million barrels per day since September last year to try to prop up prices.

OPEC meets next on May 28.

Gulf oil producers said on Sunday they could tolerate moderate crude prices for longer to help revive global growth but shared a concern with consumer nations that a prolonged period of low prices could sow the seeds of a future fuel price spike.

(Additional reporting by Richard Valdmanis, Robert Gibbons, Gene Ramos, and Matthew Robinson in New York, Fayen Wong in Perth; editing by Jim Marshall)

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