After a man was diagnosed with Europe's first case in Spain, the EU health commissioner urged citizens to avoid any non-essential travel to the U.S. and Mexico.
That put a dent in travel-related stocks, including American Airlines , Carnival cruise lines and Starwood Hotels, which all fell more than 10 percent.
And Starbucks shares fell 2.3 percent following a report that one of its employees was exposed to the swine-flu virus. The coffee chain wouldn't confirm the report, but shut down 10 cafes in Mexico City as a precaution.
>> How Flu Fears Will Crimp Spending—and Where
But some pharmaceutical stocks benefited as traders looked for the flu play.
American depositary shares of GlaxoSmithKline gained 7.5 percent, as the UK drug maker, along with Switzerland's Roche were expected to be the two main beneficiaries from the need for a swine flu vaccine.
Roche gained 3.5 percent in Frankfurt.
American pharmas caught the runoff: Bristol-Myers and Pfizer advanced more than 2 percent.
Drug-store stocks also benefited, including Rite Aid, which jumped 8 percent, and CVS , which gained 0.6 percent.
Meanwhile, Credit Suisse downgraded its weighting on the U.S. to "market weight" from "overweight," saying American stocks are expensive relative to their peers and that earnings momentum was middling.
In earnings, Verizonbeat expectations, helped by its acquisition of Alltel,and its operating chief said he "has never been more optimistic about the business." But shares fell 1.5 percent.
Qualcomm rose 4.4 percent, even after the cellphone-chip maker swung to a loss, hit by investment losses and legal costs related ot its settlement with rival Broadcom .
Humana jumped 6.9 percent after the health insurer reported its earnings more than doubledas its government business got a boost from Medicare Advantage enrollments. The company also raised its full-year outlook.
Whirlpool shot up 7.3 percent after the appliance maker reported a surprise profitas cost-cutting measures helped offset slumping sales.
Auto makers advanced after General Motors announced plans to cut 21,000 U.S. factory jobsby next year, phase out its Pontiac brand and offered the government GM stock in exchange for half of its debt, as part of a massive restructuring effort.
GM shares rallied 21 percent, while Ford gained 2.2 percent.
Meanwhile, Chryslershowed signs of progress with its unionized workerson its battle to stay alive on Sunday with just days left to complete deals to slash labor and debt costs or face bankruptcy.
Bank stocks ended lower after an industry source said the stress-test results showed one bank will require additional capital.
Bank of America fell 2 percent, JPMorgan dropped 1.8 percent and Citigroup lost 3.8 percent.
The first look at first-quarter gross domestic product comes out later in the week, along with a Fed meeting.
President Barack Obama's economic advisor Lawrence Summers said on Sunday that the sense of "unremitting freefall" has ended and the picture is no longer negative, but rather mixed.
World finance leaders in Washington agreed over the weekend there was a "break in the clouds" of the economic storm but said more measures were needed to ensure an end to the global recession.
A statement from the International Monetary and Financial Committee of the IMF said more action was needed to restore the health of banks and revive lending.
TUESDAY: Two-day Fed meeting begins; Case-Shiller home-price index; Richmond Fed survey; Conference Board consumer confidence; Earnings from Pfizer, Bristol-Myers, US Steel and Sun Micro
WEDNESDAY: Weekly mortgage applications; advance Q1 GDP; weekly crude inventories; Fed rate decision; Earnings from Wyeth, Aetna, General Dynamics, Time Warner, Starbucks and Visa
THURSDAY: Weekly jobless claims; personal income/spending; Kansas City Fed report; Fed's Volcker speaks; Earnings from ExxonMobil, AstraZeneca, Cardinal Health, Colgate-Palmolive, Comcast, Ericsson, Kellogg, Motorola, Viacom and MetLife
FRIDAY: Auto sales; Fed's Geithner, Bullard speak; Reuters/Univ of Mich consumer confidence; ISM manufacturing index; factory orders; Earnings from Chevron, Clorox, MasterCard and Simon Property
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