UPDATE 1-Wall St anxiety gauge falls on euro zone aid

* VIX recovers to levels seen before Thursday's plunge

* Global leaders agree to $1 trillion emergency package

* Euro zone aid makes options less attractive: traders (Adds byline, comment)

By Angela Moon and Doris Frankel
CHICAGO, May 10 (Reuters) - A key measure of U.S. stock market volatility tumbled on Monday after a $1 trillion emergency rescue package eased fears Greece's debt crisis would spread and add to losses in world financial markets.

The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's favorite measure of investor anxiety, was down 31 percent to 28.17. The index closed at 40.95 on Friday, which was the highest since April 2009.

Elliot Spar, option market strategist at Stifel Nicolaus, said the so-called VIX index was back to the levels before Thursday's dramatic plunge when the Dow index .DJI briefly fell nearly 1,000 points.

"If the fear of the euro zone implosion is off the table for now, people are not paying as much for protection," he said.

"However, I don't expect the market to rally back to their recent highs as there are resistance levels created from last week's smash."

Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group, also said traders continue to be leery of the day's bounce.

"Although we have seen a 28 percent drop in the VIX (today), we have not seen a return to levels previous to the drop in stock prices that began more than a week ago."

Option investors went on the defensive after the big drop on Thursday, seeking to protect their portfolios against further declines in U.S. stocks amid concerns that Greece's debt crisis could escalate.

The S&P 500 index .SPX jumped more than 4 percent on Monday, racking up its strongest opening on record.

"It doesn't mean the people are not all of a sudden not fearful at all. But the rescue package, the coordinated efforts of the market are giving fewer reasons to invest in options," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com in Chicago.

The VIX, which typically has an inverse relationship with the S&P benchmark, had been on the rise recently, suggesting players were inclined to seek options to manage stock market risk. The index is a 30-day risk forecast of stock market volatility. (Reporting by Angela Moon and Doris Frankel; Editing by Kenneth Barry)

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