By Mark McSherry

NEW YORK (Reuters) - Continental Airlines Inc (CAL.N: Quote, Profile, Research) and Southwest Airlines Co (LUV.N: Quote, Profile, Research), two of the healthiest major U.S. carriers, said on Thursday that record- high fuel costs led to disappointing quarterly earnings and both companies cut growth plans.

Continental's loss and Southwest's decline in profit highlight the biggest challenges facing the airline industry today -- skyrocketing fuel prices and a sagging U.S. economy.

These were also contributors to the quarterly loss reported on Wednesday by AMR Corp's (AMR.N: Quote, Profile, Research) American Airlines.

Tough market conditions may also pressure Continental to take part in a merger to better compete with rivals Delta Air Lines Inc (DAL.N: Quote, Profile, Research) and Northwest Airlines Corp (NWA.N: Quote, Profile, Research), which on Monday said they planned to combine to form the world's largest airline by traffic volume.

Continental and UAL Corp's (UAUA.O: Quote, Profile, Research) United Airlines have reportedly been in merger talks for months.

"The proposed Delta-Northwest merger will change the competitive landscape for Continental and the entire airline industry," Continental's chief executive Larry Kellner told investors on a conference call.

"We are reviewing our strategic alternatives and we will do what we need to do to continue our success and remain a strong long-term competitor."

On Thursday, Continental said it will reduce domestic mainline capacity 5 percent beginning this fall and take another 14 single-aisle 737-300 aircraft out of service as leases expire beginning in September.