April 28 (Bloomberg) -- U.S. stocks retreated for a second day as concern that banks need more capital and the swine-flu outbreak will thwart an economic recovery offset a bigger-than- expected jump in consumer confidence.

Bank of America Corp. and Citigroup Inc. slumped at least 5.9 percent on a Wall Street Journal report that government stress tests may show the lenders need more cash to shore up balance sheets. Delta Air Lines Inc., the largest airline, slid 9.9 percent on concern swine flu will reduce travel. General Motors Corp. tumbled 11 percent as bondholders said a plan to exchange $27 billion in debt for equity is unreasonable.

The Standard & Poor’s 500 Index lost 0.3 percent to 855.16. The Dow Jones Industrial Average slipped 8.05 points, or 0.1 percent, to 8,016.95. The Russell 2000 Index of small companies added 0.7 percent.

“There’s ongoing uncertainty about the health of the banking system,” said Joseph Keating, who manages $3 billion as chief investment officer at RBC Bank, a unit of Royal Bank of Canada, in Birmingham, Alabama. “It’s unsettling. And then you lay that on top of the swine flu and what that means for economic activity.”

Benchmark indexes fluctuated throughout the day as the decline in banks was offset by gains in consumer shares after the Conference Board’s confidence index climbed the most since November 2005.

The S&P 500 has rallied 26 percent since March 9 as companies from American Express Co. to Ford Motor Co. posted better-than-estimated earnings and investors speculated U.S. Treasury Secretary Timothy Geithner’s plan to finance the purchase of as much as $1 trillion in illiquid assets from banks will help to pull the global economy out of a recession.

Earnings Watch

While 68 percent of the S&P 500 companies that reported first-quarter results have beaten estimates, analysts predict profits will decline through September, dropping 34 percent in the first quarter and 33 percent in the second.

Bank of America slid 77 cents to $8.15, while Citigroup fell 18 cents to $2.89. The two banks plan to mount rebuttals to the Federal Reserve’s preliminary report following the tests conducted on 19 financial companies, the Journal said.

Bank of America spokesman Robert Stickler declined to comment on the report, saying the process allows banks to respond to the government’s comments. Citigroup spokesman Jon Diat also declined to comment on the stress test and said the bank’s capital base is “strong.”

Financials Slump

Bank of America needs $60 billion to $70 billion of capital, according to Freidman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm. The Charlotte, North Carolina-based lender and New York- based Citigroup already have received a combined $90 billion in U.S. bailout funds.

The S&P 500 Financials Index slumped 1.8 percent for the steepest decline among 10 industries, trimming its rebound since March 6 to 71 percent.

GM, the largest U.S. automaker, tumbled 23 cents to $1.81 for the steepest drop in the Dow after bondholders said they find the automaker’s offer to exchange their $27 billion in debt for equity unreasonable and said they should be treated more equitably with labor unions.

Airline shares fell for a third day on concern that the swine flu outbreak will crimp travel. Delta lost 67 cents to $6.08. UAL Corp., parent of United Airlines, the third-largest U.S. carrier, slid 8.2 percent to $5.05.

Swine Flu

The number of confirmed cases of swine flu in the U.S. jumped to 64 as global health officials monitored New York City as a second possible epicenter for the international outbreak.

As many as 152 people have died in Mexico with suspected swine flu. The virus has taken its biggest hold in four states in Mexico. The U.K., Israel, Canada, New Zealand and Spain have also confirmed cases. The World Health Organization said it’s watching New York to see whether the virus has become rooted in another country, a finding that would boost the agency’s pandemic alert system.

A gauge of retailers, restaurant chains, hotel companies and other so-called consumer discretionary stocks advanced as much as 1.7 percent to lead the market’s advance earlier, before paring its gain to 0.2 percent by the end of the day.

The Conference Board’s confidence index climbed to 39.2, the highest level since November, from 26.9 in March, the New York-based research group said today. The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007, indicating that the market may be stabilizing. The S&P/Case-Shiller index’s 18.6 percent drop compares with a record 19 percent decline the month before.

IBM Dividend, Buyback

International Business Machines Corp. added 2 percent to $101.94. The world’s biggest computer-services provider said it increased its dividend by 10 percent and boosted its stock buyback plan by $3 billion.

Office Depot Inc. climbed 11 percent to $2.82 for the second-biggest gain in the S&P 500. The world’s second-largest office-supplies retailer reported first-quarter earnings excluding some items of 10 cents a share, beating the average analyst estimate for a loss of 10 cents a share.

Southwestern Energy Co., the only energy company in the S&P 500 to rise last year, climbed 9.5 percent to $36.64 after reporting higher-than-estimated first-quarter profit. The stock led the S&P 500 Energy Index to a 0.5 percent advance.

Coventry Health Care Inc. added 7.1 percent to $15.22. The provider of medical benefit plans posted first-quarter earnings excluding some items of 30 cents a share, beating the average analyst estimate by 21 percent.

FPL Group Inc. gained 5.8 percent to $54.27. The largest U.S. producer of wind power said first-quarter profit rose 46 percent, beating analysts’ estimates, on increased capacity in North Dakota, Iowa and Texas and lower costs at the utility unit.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: April 28, 2009 16:34 EDT