* Wall Street follows Europe, Asian markets lower
* Bond prices rise as flu jitters spur safety bid
* Dollar, yen gain as pandemic fears stoke risk aversion
* Oil falls below $49 a barrel on worries of slowdown (Updates with U.S. markets; changes dateline, previous LONDON)
By Herbert Lash
NEW YORK, April 27 (Reuters) - Stocks worldwide and oil prices fell on Monday on fears that a possible flu pandemic could further weaken a global economy thrown into recession by a financial crisis.
The dollar and yen strengthened on increased risk aversion as the flu outbreak, which began in Mexico and spread to the United States and Europe, threatened to put a halt to signs of a nascent global recovery.
The dollar is a safe-haven in times of stress. Gold, often a recipient of money flows when investor risk aversion rises, fell due to a stronger dollar. Gold also was driven lower by investors who cashed in gains from a four-week high.
“Concerns Mexican swine flu could become pandemic after President Obama declared it a public health emergency helped drive the dollar and the yen higher, with the Mexican peso the hardest hit,” said Meg Browne, currency strategist at Brown Brothers Harriman in New York.
The Mexican peso MXN= fell 4.16 percent to 13.86 a dollar, while the country's IPC stock index .MXX fell 4.5 percent on. Yields on Mexico's benchmark 10-year peso bond MX10YT=RR rose 14 basis points to 7.86 percent.
Benchmark U.S. stock indexes fell more than 1 percent after the market opened but later pared losses. Investors worried a possible flu pandemic could complicate government efforts worldwide to revive the economy.
The outbreak in Mexico has killed more than 100 people.
The early sell-off on Wall Street was broad based, with airlines and shares of energy companies among the biggest casualties. Airline shares sold off in Asia and Europe on fears world travel will suffer if the flu outbreak spreads further.
The AMEX Airline index .XAL slid 9.6 percent, with shares of major airlines, including Continental CAL.N, Delta Air Lines DAL.N, UAL Corp UAUA.O and American Airlines parent AMR Corp AMR.N all down more than double digits.
The CBOE Volatility Index .VIX, often called Wall Street's fear gauge, rose almost 6 percent to 38.97.
The MSCI world equity index .MIWD00000PUS fell 1.3 percent.
U.S. Treasury debt prices rose on a safety bid, temporarily overshadowing worries about large supplies of U.S. government debt being sold to finance a bailout of the U.S. financial system and to stimulate an economic recovery.
“The global equity markets saw a severe overnight decline in response to concerns over the swine flu outbreak,” said John Spinello, senior vice president and chief fixed-income technical strategist at Jefferies & Co in New York.
“The reaction was a safe-haven bid for Treasuries,” Spinello said.
Benchmark 10-year Treasury note yields US10YT=RR eased from near 3 percent late last week to 2.94 percent in early dealings. Their price, moving inversely to yield, rose 17/32 to 98-13/32. Two-year Treasury notes US2YT=RR rose 4/32, their yields easing to 0.90 percent from 0.97 percent on Friday.
Oil prices fell nearly 6 percent to below $49 a barrel.
U.S. crude oil futures for June delivery were down $3.16 at $48.39 a barrel by 1302 GMT, erasing some of Friday’s gains of $1.93 that brought the contract to settle at $51.55. (Reporting by Edward Krudy, Ellen Freilich and Nick Olivari in New York; Jane Merriman and Jan Harvey in London; writing by Herbert Lash; Editing by Kenneth Barry)