UPDATE 2-U.S. airlines withdraw fuel fee increase

(Adds United and Continental rolling back; share prices)

By Chris Reiter

NEW YORK, Jan 22 (Reuters) - Major U.S. airlines on Tuesday rolled back a fuel surcharge increase aimed at offsetting soaring oil prices as consumers balk at higher fares, and worries over the health of the economy grow.

American Airlines, United Airlines, Delta Air Lines Inc (DAL.N), Continental Airlines (CAL.N), and US Airways Group Inc (LCC.N) all rolled back the increase on Tuesday. Northwest Airlines Corp NWA.N withdrew the increase on Monday, according to fare tracker FareCompare.com.

AMR Corp's (AMR.N) American Airlines initiated the increase last week, doubling its domestic fuel surcharge to $40 per round-trip fare, except in markets where it faces low-fare competition.

Northwest backed off the increase because of limited initial matching by Continental, a company spokesman said.

"It's basically failed," Rick Seaney, chief executive of FareCompare.com, said of the latest increase. "It doesn't surprise me at all with all the economic bad news the last few days."

The aborted increase marks the second failure to raise ticket prices in as many weeks as fears the U.S. economy is on the verge of recession mount.

A fuel surcharge increase initiated by UAL Corp's (UAUA.O) United Airlines the previous week was withdrawn after rival carriers failed to support the $50 fee.

Underscoring concerns about the economy, the U.S. Federal Reserve on Tuesday slashed a key interest rate by three- quarters of a percentage point, the biggest rate cut in more than 23 years.

"With fuel at $100 a barrel and you're still backing off, that tells me that they're now seeing the resistance of the consumer," said travel expert Terry Trippler of TripplerTravel.com.

Fuel expenses have historically ranged between 10 percent and 15 percent of an airline's operating costs. But with oil near record levels, that expense has jumped to between 25 percent and 40 percent of operating costs, according to the Air Transport Association.

With consumers showing signs of resisting fare increases, airlines will likely seek to boost revenue and offset higher costs by reducing the number of lower-priced seats they offer on each plane, Trippler said.

United-parent UAL posted a fourth-quarter loss on Tuesday, burdened by skyrocketing fuel costs and the sluggish economy. Most carriers are expected to post losses in the fourth quarter as the industry battles to rescue a recovery that began in 2006 after five years of losses.

The dour outlook for the industry led to a 4 percent decline in the Amex airline index .XAL, led by an 8 percent drop by US Airways, which is heavily-exposed to the U.S. market. UAL fell 2 percent, while AMR slipped 3.4 percent. (Reporting by Chris Reiter; Editing by Brian Moss)