Anxiety over a global flu crisis and the health of some U.S. banks rattled hopes on Tuesday that the financial system was stabilizing, but U.S. and other data suggested confidence was returning to consumers.

The Wall Street Journal reported regulators told Citigroup Inc and Bank of America Corp they needed to raise more capital following stress tests of U.S. banks. It said Bank of America needed billions of dollars.

The flu story and the story on Citi and Bank of America have spooked the whole market, said CMC Markets analyst James Hughes in London.

The report on banks compounded worries of the economic fallout from the spread of the swine flu from Mexico. The World Health Organization raised its pandemic alert to phase 4, with phase 6 being the most severe.

The virus, known as H1N1, has killed some 150 people in Mexico. Milder symptoms have appeared in countries including the United States, Canada, Spain, Britain, Israel and New Zealand.

As long as it's contained, it will be a short-term blip, said Jonathan Basile, economist at Credit Suisse in New York.

Others saw the potential for more damage to an already weak global economy.

The timing couldn't be worse. It may also end up serving as a barrier to global trade, said Mark Zandi, chief economist with Moody's Economy.com.

In the short term, the travel and oil industries are vulnerable to fallout from the flu outbreak, while drug companies could benefit from it, analysts said.

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

DATA OFFSETS BANK REPORT

The U.S. banks report and flu story pushed down European shares. But Wall Street stocks recovered from early losses after data showed a bigger-than-expected improvement in U.S. consumer confidence in April.

A separate report suggested the sharp decline in U.S. home prices, the epicenter of the global downturn, may be slowing.

Those are the green shoots that everybody's been talking about but you still have a lack of clarity on the timing and parameters of the recovery, said Jim Awad, managing director at Zephyr Management in New York.

The yen rose to multi-week highs against the euro and the dollar eased. Oil was down 2 percent at just above $49 a barrel.

Across the Atlantic, data indicated the mood of consumers and business was improving but European banks were hit by more uncertainty.

British retail sales jumped unexpectedly in April, the first positive showing since March 2008.

French consumer confidence improved marginally for the second straight month in April, while business confidence in Italy recovered more strongly than expected after 10 months of falls.

German inflation picked up slightly to 0.7 percent on an annual basis in April after hitting a 10-year low in March.

The broader global recession cast a cloud over Europe's banks as profits at Spain's BBVA slipped and key businesses at Deutsche Bank AG showed signs of strain.

(Reporting by Reuters correspondents worldwide; Writing by Richard Leong; Editing by John O'Callaghan)

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