In the U.S., American Airlines owner AMR Corp. and United Airlines' parent company UAL Corp. slumped around 15 percent after the open. In Europe, Deutsche Lufthansa AG fell 9 percent, while British Airways PLC was down 8 percent. Earlier, Australia's Qantas Airways fell 4 percent while Hong Kong-based Cathay Pacific Airways slid 8 percent.

Elsewhere, travel and hotel companies were also sold off, with British cruise line firm Carnival PLC down more than 7 percent and German travel company TUI AG slid more than 5 percent as it revealed that it was suspending all trips to Mexico City as a precaution amid the outbreak of a deadly strain of swine flu.

BGC Partners' Wheeldon said airlines and travel companies were "easy prey" for worried investors but said the markets had managed to understand through the day that the world is far better prepared to deal with a big global outbreak than it was in the early part of the decade when SARS first reared its ugly head.

While airlines and travel-related companies tanked, pharmaceutical companies enjoyed a modest rally in falling markets amid expectations that demand for anti-viral drugs would rise. Both Swiss drugmaker Roche Holding AG — the maker of Tamiflu — and GlaxoSmithkline PLC, which manufactures the Relenza drug, rose 4 percent.

Mexico officials say the flu strain may have sickened 1,614 people since April 13 but laboratory testing to confirm that and how many truly died from it — at least 22 so far out of the 103 suspected deaths — is taking time.

Worries about the epidemic's spread will likely remain at the forefront of investors' mind over the coming days and overshadowed any hopes generated over the weekend by the announcement from the Group of Seven finance ministers that the worst of the world recession may be over and that recovery may emerge by the end of the year.

"Market worries over a flu pandemic have drawn attention away from ministerial meetings that took place over the weekend," said Stephen Lewis, an analyst at Monument Securities.