Wall Street was set for a drop of about 1 percent at the open on Tuesday as a report that Bank of America Corp and Citigroup Inc may need more capital revived fears about the stability of the struggling financial sector.

Worries over the economic impact of the threat of a flu pandemic also weighed as New Zealand and Israel confirmed cases of swine flu, making them the latest countries hit by a new strain that has killed up to 149 people in Mexico.

Data on the housing market could fuel more optimism that the severity of the recession is abating after data showed that prices of single-family homes fell in February, but the rapid pace of decline had slowed.

U.S. regulators have told Bank of America and Citigroup they may need to raise more capital following stress testing of the two banks, the Wall Street Journal reported.

The shortfall amounts to billions of dollars at BofA, the paper said, citing people familiar with the bank, adding it is likely the U.S. Federal Reserve will have determined other banks might also need more capital.

U.S. regulators are talking to Citigroup about their capital position after the stress tests, sources said. The bank may not need extra capital, but if it does, it does not expect to require capital from the government, according to the sources.

Shares of Bank of America were down 8.6 percent at $8.15 before the opening bell, and Citigroup lost 6.2 percent to $2.88.

Basically the market here is in a minor corrective move, and some of the headlines that are being reported are causing this little pullback after a substantial run-up, said Peter Cardillo, chief market economist at Avalon Partners in New York.

In the latest batch of corporate results, Pfizer Inc

reported better-than-expected first-quarter profits amid cost cutting and reaffirmed its full-year revenue outlook. Shares of the drugmaker gained 1.4 percent to $13.68 in premarket trade.

S&P 500 futures fell 13.70 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 101 points, and Nasdaq 100 futures were down 12 points.

Adding to the negative pressure on the financial sector, Deutsche Bank pointed to Bank of America and Wells Fargo & Co as among 10 banks that may need to raise capital after it conducted its own stress test on 16 banks, and initiated them with hold ratings. Wells Fargo was off 3.4 percent to $19.60.

On the data front, investors are awaiting a report on consumer confidence for April. Also, the Federal Open Market Committee begins a two-day meeting on interest rate policy with an announcement expected on Wednesday.

Also in the drug sector, Bristol-Myers Squibb Co said first-quarter profit fell on negative foreign exchange factors and falling sales of its cancer medicine, offsetting higher revenue from other medicines.

Stocks fell on Monday on concerns over the flu outbreak could dampen optimism about the economy, overshadowing a sweeping overhaul of General Motors Corp and gains in biotechnology stocks.

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

(Reporting by Leah Schnurr)

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