An outbreak of swine flu dampened tentative hopes for the global economy, sending markets lower on Monday and analysts fear a possible pandemic could force countries further into recession.

The virus, a new strain of swine flu, has killed 103 people in Mexico and spread to the United States. The World Health Organization said the outbreak was a public health emergency of international concern that could become a pandemic, or global outbreak of serious disease.

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, damaging prospects of recovery in a world economy deep in financial crisis.

The SARS outbreak, which disrupted travel, trade and the workplace in 2003, cost the Asia Pacific region an estimated $40 billion. It lasted six months and killed 775 of the 8,000 people it infected in 25 countries.

A nasty chill will run through the market with swine flu as people think back to the SARS virus, said Justin Urquhart Stewart, investment director at Seven Investment Management.

The threat of the pandemic will add further weakness to global trade -- we saw with SARS tangible percentage points knocked off the index and that was in a buoyant time. Put that in a weaker time and it is likely to be more unpleasant.

European shares opened lower, with the FTSEurofirst 300 index down 1.11 percent at 0830 GMT. Airline stocks were hit by fears the outbreak would hurt travel but drugmakers were higher on vaccine hopes against the virus.

Japan's Nikkei average closed up just 0.2 percent on Monday, giving up earlier gains as the yen rose sharply and other Asian stocks fell on concerns over the flu outbreak.

Shares in Swiss drugmaker Roche Holding AG (ROG.VX: Quote, Profile, Research, Stock Buzz) rose. The company said it was working on increasing production of Tamiflu, a drug shown to work against the new flu strain. But a company spokeswoman said the production lead time for the drug from synthesis of the product to packaging was eight months.

We've always made it clear that this cannot happen overnight which is why it is so important that countries are prepared before the pandemic breaks out, she said.

'TRANSITORY'

Mexican Finance Minister Agustin Carstens tried to calm investors scared by the outbreak of flu, saying its impact on the economy will be transitory.

The swine flu outbreak in Mexico came just when more world policymakers were proclaiming signs of a possible stabilization to the global economy.

Six or eight weeks ago, there were no positive statistics to be found anywhere. The economy felt like it was falling vertically. Today, the picture is much more mixed. I think that sense of unremitting freefall that we had a month or two ago is not present today, Lawrence Summers , economic adviser to U.S. President Barack Obama, said on Sunday.

The delicate state of the global economy was underlined by the Japanese government which cut its economic forecasts on Monday, saying gross domestic product would shrink 3.3 percent over the next year, and a senior ruling party official said further stimulus would be needed.

The Bank of Japan is expected keep interest rates near zero when it meets on Thursday but cut its economic forecasts and maintain a cautious view on the global outlook. BOJ Governor Masaaki Sharakawa has signaled the BOJ's monthly policy review will predict a gradual recovery toward the end of this year or early in 2010.

In Europe, two European Central Bank Governing Council members suggested further reductions in the main refinancing rate.

Council member and Bundesbank President Axel Weber said cutting the rate to 1 percent from 1.25 percent was necessary as economic growth would continue to lag its potential for some time.

I think 1 percent is a sensible lower limit, because you can't look just at the main refinancing rate. The deposit rate also plays a role, Weber told the Frankfurter Allgemeine Zeitung in an interview.

ECB Governing Council member Nout Wellink said the ECB should discuss lowering rates below 1 percent. Asked by Markets News International if the main refinancing rate should go below 1 percent, Wellink said: This is part of a discussion we should have in the Governing Council. Of course that should be discussed.