* Chan says H1N1 could mutate in "unpredictable ways"

* Japan relaxes flu measures, but prepares big aid project

* U.S. gives companies $1 billion to start vaccine

* Gene analysis shows virus lurked undetected

(Updates with vaccine news and genetic studies)

By Laura MacInnis and Stephanie Nebehay

GENEVA, May 22 (Reuters) - The world must be ready for H1N1 swine flu to become more severe and kill more people, World Health Organization chief Dr. Margaret Chan said on Friday.

A genetic analysis of the new virus showed it must have been circulating undetected for some time, in pigs or perhaps in other animals.

The WHO is poised to declare a full pandemic of the virus, which has infected more than 11,000 people in 42 countries and killed 86. And U.S. health officials released $1 billion for companies to get started on a vaccine in case it is needed.

The virus must be closely monitored in the southern hemisphere, as it could mix with ordinary seasonal influenza and change in unpredictable ways, Chan told the WHO annual congress in Geneva. [ID:nLM945575]

"In cases where the H1N1 virus is widespread and circulating within the general community, countries must expect to see more cases of severe and fatal infections," she said. "This is a subtle, sneaky virus."

An international team of researchers who analyzed all eight genes of the new virus confirmed its sneakiness, saying it was so different from its ancestral strains that it must have been circulating undetected for years. [ID:nN22387017]

They confirmed it is a hybrid of two other mixtures -- one a so-called triple reassortant of pig, bird and human viruses, and another group of swine viruses from Europe and Asia.

"The results of the study show the global need for more systematic surveillance of influenza viruses in pigs," Dr. Nancy Cox, chief of the influenza division at the U.S. Centers for Disease Control and Prevention, told reporters.

The researchers said it is likely that other odd mixtures are infecting pigs but simply have not yet been seen.

"We do know that our veterinary colleagues at USDA (the U.S. Department of Agriculture) and elsewhere in the world are now looking to see if samples in freezers from pigs or other animals might provide the missing link," Cox said.

VACCINE CASH

The U.S. Health and Human Services Department said it was setting aside $1 billion to help companies develop a vaccine against the new strain.

HHS Secretary Kathleen Sebelius said the money will be used for clinical studies over the summer and for production of vaccine ingredients for the government's stockpile of drugs and vaccines that is on hold in case of a pandemic of influenza.

Companies approved to sell flu shots in the United States are Sanofi-Aventis SA

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, Novartis AG

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, GlaxoSmithKline PLC

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and CSL Ltd

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. AstraZeneca

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unit MedImmune also sells a nasal spray flu vaccine.

U.S. officials reported 6,552 suspected and confirmed cases, 300 hospitalizations and nine deaths but said there were likely far more than that. The CDC's Dr. Anne Schuchat said only about one in 20 cases of influenza are reported, which would put the U.S. caseload at about 130,000.

Flu activity was calming in general across the United States, with a few exceptions, she said.

"Today the situations in the New York City area and a few other parts of the country have led to more schools closing," she said. "We believe that there are 60 schools around the country that have dismissed students and that there are about 42,000 students out of schools because of this virus."

Russia reported its first confirmed case of the disease and the WHO was testing two suspected cases in Democratic Republic of Congo, which would be Africa's first. [IDLM967383]

Beijing's municipal health bureau reported the second case in the Chinese capital, a 65-year-old Chinese-American man who flew to Beijing from New York on Thursday.

STORING ANTIVIRALS

Japan said it would launch a $31.85 million project to fight the virus in poorer Asian states.[ID:nSP476538]

Under the initiative, Japan will store Roche AG's

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Tamiflu and GlaxoSmithKline's

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Relenza flu drugs as well as masks and gowns, at a warehouse in Singapore in case of a major outbreak.

WHO officials say Asian nations, with young populations and endemic chronic illnesses, are particularly vulnerable to the spread of the new virus. [ID:nMAN91504]

Most of Japan's 300 infections appear mild and officials relaxed preventive measures to allow some suspected patients to go to regular medical institutions rather than special "fever centres," and schools will not be automatically shut down. [ID:nSP476538]

Robert Booy, who heads Sydney University's immune research and surveillance centre, said more people than usual in Southern Hemisphere countries could become infected this winter and die from the new flu because of its novelty.

"Once you have enough virus out there, evolution is simple," Booy said, adding that the H1N1 virus could change to the point that it could get "nasty."

In Australia, where cases have spread across several states, the government raised its flu alert level to mid-range "containment, which gives it authority to close schools. (Reporting by Reuters reporters worldwide; writing by Andrew Roche and Maggie Fox))