NEW YORK (CNNMoney.com) -- Stocks of major U.S. airlines tumbled in early trading Thursday after the arrest of 21 people in Britain accused of plotting terrorist attacks on trans-Atlantic flights, then rebounded by midday.

Shares of American Airlines parent AMR Corp. (down $0.16 to $20.13, Charts) was down as much as 5 percent in morning trading, while United parent UAL Corp. (down $0.40 to $23.43, Charts) tumbled about 8 percent, Continental Airlines (down $0.31 to $23.90, Charts) also was off as much as 5 percent and US Airways (down $0.25 to $40.53, Charts) dropped more than 3 percent at one point.

Even Southwest Airlines (up $0.14 to $17.04, Charts), which does not operate any international flights, saw its stock fall nearly 2 percent in the early going.

But the sell-off was short-lived, and while all those shares were still in negative territory just before noon ET, none was off more than 1.5 percent.

Major European carriers, including British Airways (Charts), Lufthansa (Charts) and Air France-KLM (Charts) also fell sharply in European trading.

After the arrests, U.S. officials announced a new set of security rules for passengers boarding planes at U.S. airports, including a ban on any kind of liquid in carry-on luggage, as well as closer examinations of carry-on luggage. The Department of Homeland Security also raised the nation's threat level to "severe," or red, for commercial flights originating in the United Kingdom bound for the United States, the first time it has issued such a threat assessment. (Full CNN.com coverage)

The news comes as the nation's airlines were enjoying their first profitable summer of travel since 2000, after the U.S. industry lost $42 billion between 2001 and 2005.

Ray Neidl, airline analyst for Calyon Securities, said he believed that the early stock sell-off was probably an overreaction.

"At this point I'm assuming it's a short-term blip," he said. "We'll have to see what happens during the rest of the peak travel season in August as well as the post-Labor Day period, if there's any significant drop in bookings.

"Cost-wise, the cancelled flights will be like having a snowstorm hit where you have your planes out of position for a couple of days," he added.

But Michael Boyd, president of the Boyd Group consulting firm in Evergreen, Colo., said that new security measures will hurt airline traffic if it causes delays at check-ins.

"Short-haul travel, especially short-haul business travel, is the first to get hit if you have long security lines," he said.

"People talk about the drop in demand for air travel right after 9/11, but it wasn't as much that they were scared; they just didn't want to go to the airport and stand in line for three hours."

The Transportation Security Administration said that passengers should allow additional time to check in, but it did not give any guidance as to how much additional time.

Statements from officials overseeing airports in Chicago and Los Angeles suggested travelers arrive two to three hours before their flights, with LA officials suggesting arriving three to four hours before international flights. The Port Authority of New York and New Jersey, which runs the three New York-area airports, recommended arriving two hours before a flight.

But how early passengers really needed to arrive was not clear Thursday. The Web site for Atlanta's Hartsfield International Airport listed only a 20- to 30-minute wait at its security checkpoints just before midday Thursday.

Boyd said he believes that other than the justified concerns of travelers about inconvenience and long check-in delays, the news of the arrests will not scare people away from flying.

"This happened in a foreign land. They're going to say, 'It's OK, I can keep flying,'" said Boyd. "The average person believes we have great airport security. That's a wonderful fantasy to have."

The Air Transport Association, the industry's trade group, issued a statement saying it supported the steps being ordered by the Department of Homeland Security.

"The airlines are cooperating fully with DHS in implementing these measures to assure the safety and security of our customers and crews," said the industry's statement. "While it is likely these temporary measures will result in passenger inconvenience, we hope that the traveling public understands these measures will allow them to travel with confidence in the security of our system."

U.S. airlines reported a record 85.8 percent of seats filled in July, helping carriers charge higher fares, which are up about 11 percent for the first half of the year.

The airlines were already seeing weak demand for air travel in the summer of 2001 before the Sept. 11 attacks, due to the weak economy and the resulting drop in demand for business travel.

Most of the major carriers were already losing money back then and only 77.6 percent of seats were filled in August 2001, while the average fare that month was down 12.6 percent from a year earlier, according to figures from the Air Transport Association, the industry group.

But Boyd said that while demand for travel is much better now than it was five years ago, the financial losses since then have left the industry in a much weaker position.

"Every airline, even the bankrupt ones, are reporting an operating profit right now, but that doesn't mean there's a lot of margin there," he said. "And there's not a lot of cash left. At 9/11, they all still had a lot of lines of credit. They don't have that cushion now."

In addition to the airline stocks, Dow component Boeing (down $1.32 to $75.84, Charts), the nation's No. 1 aircraft maker, sank about 2 percent in early trading on the terrorism news.

A report in the Wall Street Journal that the U.S. Air Force continues to review a $412 million contract adjustment that Boeing received on the C-17 aircraft program was also probably weighing on the stock.

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