NEW YORK - Stocks fluctuated Tuesday following a report that the government is considering extending aid to troubled insurer American International Group Inc. the latest in a string of companies that investors worry could be undone by a shortage of cash.
A partial recovery in several other financial companies helped the sector show signs of life a day after leading Wall Street to its worst session in years. Investors also grew hopeful about a Federal Reserve interest rate cut.
Worries about AIG's well-being intensified Monday and early Tuesday after several ratings agencies downgraded the company. Lower ratings can add to the amount of money the already cash-strapped company has to set aside. Investors fear that a failure by the world's largest insurer would touch off a wave of financial turmoil.
But a CNBC report said the government is at least discussing extending a financial lifeline to the company; it cautioned that an agreement is far from certain and also that the company isn't likely to find help from the private sector. AIG fell $2.07, or 43 percent, to $2.69 after being down nearly 75 percent in earlier trading.
Markets around the world were still reeling from the bankruptcy filing of Lehman Brothers Holdings Inc. and the quickly assembled weekend sale of Merrill Lynch & Co. to Bank of America Corp. Investors worry that tectonic shifts in the power structure of Wall Street signal that the financial sector's trouble with imperiled credit are far from over.
The Fed's regularly scheduled meeting, which many economists had expected would be a pro forma occurrence, is now much anticipated, especially after central banks around the world have loosened money supplies this week. The banks are hoping an injection of capital will help soothe markets following the most serious tumult of the 14-month-old credit crisis.
Steve Sachs, director of trading at Rydex Investments, contends that the market won't be able to move past its concern about the financial sector until it sees a resolution of its worries over AIG.
"I think the AIG issue needs to get solved and it needs to get solved today," he said.
In late morning trading, the Dow fell 34.52, or 0.32 percent, to 10,882.99. The Dow rose as much as 105 points and fell as much as 175; on Monday, the Dow lost 504 points, its largest drop since the September 2001 terror attacks.
Broader stock indicators also turned higher. The Standard & Poor's 500 index rose 5.46, or 0.46 percent, to 1,187.24, and the Nasdaq composite index fell 9.49, or 0.44 percent, to 2,170.42.
Bond prices rose as investors turned away from the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.37 percent from 3.41 percent late Monday.
Light, sweet crude fell $3.70 to $92.01 on the New York Mercantile Exchange as investors placed bets that slowing economic growth will crimp demand. The dollar was mixed against other major currencies, while gold prices fell.
Some banks advanced. JP Morgan & Co. rose $2.47, or 6.7 percent, to $39.47, while Wells Fargo & Co. rose $3.80, or 12 percent, to $34.80.
Names that investors often rely on as safe bets in a weak economy also rose. Wal-Mart Stores Inc. rose $1.24, or 2 percent, to $62.87, while McDonald's Corp. rose 77 cents, or 1.2 percent, to $64.49.
The market showed little reaction to the first drop in the Labor Department's Consumer Price Index in nearly two years. The CPI fell 0.1 percent last month, while the index excluding food and energy costs edged up a mild 0.2 percent. Both figures were in line with analyst expectations.
Some corporate news likely added to investors' unease.
Goldman Sachs Group Inc., the largest of the two big independent investment banks on Wall Street, posted its sharpest decline in earnings since becoming a public company in 1999. The company said quarterly earnings fell 70 percent from a year earlier and that it saw a marked decrease in client activity. The profit results were better than Wall Street had been expecting, though revenue fell short. The stock fell $4.71, or 3.5 percent, to $130.79.
Dell Inc. warned that it sees a further softening in global demand in the current quarter. The computer manufacturer fell $1.68, or 9.4 percent, to $16.31.
Hewlett-Packard Co. announced plans Monday to cut 24,600 jobs, or about 8 percent of its work force, over the next three years as it works through its acquisition of technology-services company Electronic Data Systems Corp. HP shares were little changed early Tuesday. HP rose $1.68, or 3.7 percent, to $47.01.
The Russell 2000 index of smaller companies rose 0.04, or 0.01 percent, to 689.80.
Overseas, markets in Asia fell sharply Tuesday after being closed Monday. Japan's Nikkei stock average fell 4.95 percent. Hong Kong's Hang Seng index lost 5.44 percent.
In Europe, Britain's FTSE 100 fell 3.13 percent, Germany's DAX index lost 1.35 percent, and France's CAC-40 fell 1.06 percent.