* MSCI world equity index down 1.4 percent
* US bank report, flu outbreak deal stocks, oil double blow
* Yen hits one-month high against dollar; govt bonds firm
By Natsuko Waki
LONDON, April 28 (Reuters) - World stocks and oil fell on Tuesday and investors took refuge in the yen and government bonds as a report that major U.S. banks may need more capital compounded market fears about a flu pandemic.
World stocks shed 1.4 percent and oil dropped 2.6 percent after the Wall Street Journal said U.S. regulators were pushing Bank of America and Citigroup to raise more capital following the initial results of stress tests on 19 U.S. banks.
The World Health Organization raised its alert level on swine flu to a phase 4, one step closer to declaring the first flu pandemic in 40 years.
New Zealand and Israel confirmed cases on Tuesday, the latest countries hit by a new strain that has killed up to 149 people in Mexico and has shown up in north America and Europe.
"The flu story and the story on Citi and Bank of America have spooked the whole market," CMC Markets analyst James Hughes said.
"We will have to wait until the results of the stress tests on May 4 and it does raise fears because Citi and Bank of America are not necessarily the worst hit."
The MSCI world equity index fell 1.4 percent, extending Monday's losses after seven weeks of gains, and the FTSEurofirst 300 index dropped more than 2 percent.
Futures on the U.S. S&P 500 pointed to a weaker start on Wall Street.
In pre-market trading, Bank of America fell more than 10 percent while Citigroup lost 7.5 percent. The 19 banks tested hold two thirds of the assets and more than half of the loans in the U.S. banking system.
The traditionally safe-haven yen rose to as high as 95.63 per dollar before trimming gains. Earlier the Japanese currency hit a seven-week high of 124.38 per euro.
Government bonds jumped as equity market losses accelerated, with the June Bund future rising 42 ticks.
RAISING ALERT
More countries have reported cases of the flu, and countries such as Australia and South Korea were testing for the virus.
But so far the deaths have not spread beyond Mexico, where the outbreak began.
Airline stocks were among the hardest hit, with British Airways down 4 percent.
U.S. crude oil fell to $48.89 a barrel while cooper for three-month delivery fell 3.5 percent to $4,179 a tonne.
"The outbreak of Swine Flu comes at a very tenuous time for global materials markets, struggling with the global financial crisis, and as such has the potential to swing the market's volatile mood negatively to demand and volume shortfalls," UBS said in a note to clients.
"Nevertheless SARS experience suggests that equity performance is more likely to look through the event quickly to bigger strategic and structural issues."
Emerging market stocks fell 2.1 percent, with export-dependent economies seen vulnerable to the spread of swine flu. (Additional reporting by Jessica Mortimer, editing by Mike Peacock)