After a day of wild swings and pivotal headlines, Wall Street closed sharply higher on hopes the government will rescue insurance giant AIG. 

Today's Market

The Dow Jones Industrial Average jumped 141.51 points, or 1.30% to 11059.02, the Standard & Poor’s 500 added 20.90 points, or 1.75%, to 1213.60 and the Nasdaq Composite picked up 27.99 points, or 1.28%, to 2207.90. The FOX 50 gained 11.62 points, or 1.35%, to 874.99.

Volatility reigned on Tuesday. While stocks ended the day solidly higher, the markets fluctuated between positive and negative territory for much of the session and the blue chips moved in a wide range of more than 300 points. 

The turbulence follows a 504-point plunge on the Dow, the sixth-largest point loss ever and the largest since the aftermath of the Sept. 11 terrorist attacks. Monday's losses were the largest on a percentage basis in more than six years.

“All of the financials are in complete disarray. There is a tremendous amount of nervousness, which is breeding volatility," said Anthony Conroy, head trader at BNY ConvergEx. 

Bank of America (BAC), which unexpectedly acquired Merrill Lynch (MER) over the weekend, and JPMorgan Chase (JPM) soared double-digit percentages to lead the Dow higher on Tuesday. Those gains helped offset steep declines from AIG (AIG) and General Motors (GM), the two biggest drags on the Dow.

While AIG was clearly in the spotlight, it was hardly the only headline. Also on Tuesday, the Federal Reserve declined to lower interest rates, the government reported the first monthly drop in consumer prices in nearly two years and crude oil prices nearly tumbled below $90 a barrel. 

AIG Searches for a Lifeline

With the clock ticking on AIG, reports swirled of a possible government rescue of the world’s largest insurer. Bloomberg reported late Tuesday the Federal Reserve is considering a "loan package.” AIG was also boosted after new SEC filings showed its former CEO, Maurice "Hank" Greenberg, is considering a proxy fight for his old company. 

No bailout plan was announced before the end of trading and the Treasury Department has not officially changed its plans, leaving AIG in the same predicament it started the day in. Late Monday AIG suffered a major setback when major ratings agencies downgraded the insurer's credit ratings, making it increasingly difficult to raise cash.

Shares of AIG closed lower but well off steep declines of more than 60% from earlier in the day. Volume in AIG’s shares was massive, eclipsing 1.1 billion by the closing bell. By comparison, the entire trading volume on the New York Stock Exchange was almost 2.2 billion.

The enormous swings in the stock market reflect the level of concern and confusion on Wall Street about AIG. Various reports indicated if AIG didn’t raise new capital -- it is reportedly seeking $70 billion to $75 billion -- it would be forced to follow in the footsteps of Lehman Brothers (LEH) by filing for bankruptcy.

A collapse of AIG could have widespread consequences for Wall Street’s psyche and the nation's financial system as the company holds nearly $1 trillion worth of assets on its balance sheet and has ties to almost every major bank.

Meanwhile, Lehman Brothers, whose bankruptcy sparked a 500-point selloff on Monday, reached an agreement to sell its U.S. capital-markets business to British bank Barclays (BCS), according to published reports. The Wall Street Journal reported the agreement may save as many as 9,000 Lehman jobs. 

Fed Holds the Line

On any other day the Federal Reserve's decision to hold interest rates steady would have been the top story. In its first unanimous decision in a year, the central bank kept the federal funds rate, the amount banks charge each other for overnight loans, at 2%. It marked the third consecutive meeting the Fed held rates steady following a string of seven straight rate cuts, beginning a year ago at the start of the credit crisis.

"Strains in financial markets have increased significantly and labor markets have weakened further," the FOMC said in a statement, citing tighter credit, weaker spending and slowing export growth. 

The Fed decision was somewhat surprising as Wall Street had bet there was a good chance the central bank would lower rates to help ease the turmoil in the financial markets. Federal Reserve Chairman Ben Bernanke would have had some cover to lower rates as crude oil prices have plummeted in recent months, lessening the threat of inflation. Rate cuts are used to encourage economic growth but also have the potential to fan inflation. 

Also Moving the Markets

The markets weren't helped by Goldman Sachs (GS), which reported its worst quarter since going public in 1999. The firm at 85 Broad St., one of just two remaining independent investment banks, saw its third-quarter profit plunge 71% to $810 million. 

Goldman's earnings of $1.73 per share beat analyst estimates. However its $6.04 billion in revenue disappointed. Shares of Goldman fell by double-digit percentages to 52-week lows before closing with just slight losses.

On the economic front, the Labor Department said consumer prices fell in August by 0.1% -- the first monthly decline since October 2006. The government also said core inflation, which removes food and energy prices, increased by 0.2% in August. 

Wall Street had a muted response to crude oil prices, which dove as low as $90.55 a barrel on Tuesday. Crude closed at $91.15 a barrel, down $4.56 on the day. The action comes just a day after crude closed below $100 a barrel for the first time since March. 

The latest trend to the downside has been fueled by concerns the credit crisis will hamper economic growth, further weakening demand. As recently as early July, oil prices had set all-time records of $147 a barrel. 

Corporate Movers

Washington Mutual (WM) is not in active talks to sell itself to JPMorgan Chase (JPM), Reuters reported. The news agency report conflicted with an article in the UK paper Daily Mail that indicated JPMorgan was in advanced talks to buy the nation's largest savings-and-loan. Late Monday Seattle-based WaMu suffered another setback when Standard & Poor's slashed the bank's credit ratings into junk status. Shares of WaMu, the nation's largest savings-and-loan, plummeted 85% so far this year. 

Constellation Energy (CEG) plummeted as much as 70% before rebounding on Tuesday as shareholders worried about the company’s credit lines and its exposure to Lehman Brothers. The cost to insure the debt of Constellation jumped 60% on Monday, according to Markit Intraday. Also, S&P Equity Research lowered its rating on Constellation to “hold” from “buy” and its price target to $33 from $46.

Best Buy (BBY) fell sharply after reporting a weaker-than-expected profit in the second quarter. The electronics retailer said its profit fell 19% to 48 cents per share as revenue rose 12% to $9.8 billion. Analysts had been expecting a profit of 57 cents on revenue of $9.67 billion.

Dell (DELL) warned of further softening in global sales in the third quarter, sending it shares diving 11% to 52-week lows. The latest warning follows a similar one made when Dell reported a sharp drop in second-quarter earnings on August 28. Dell, the No. 2 global computer maker, has seen its shares fell more than 25% year-to-date

General Motors (GM) unveiled its highly anticipated Chevy Volt on Tuesday but saw its shares come under more pressure as concerns remain about the impact of the credit crisis. The battery-powered Volt is expected to go on sale at the end of 2010. CEO Rick Wagoner told reporters the turmoil in the financial markets is “not a good development.” He also said he believes $25 billion is a “fair amount” in potential government loans for the auto industry.

Amgen (AMGN) received a boost from new data that show the biotech giant's experimental osteoporosis drug denosumab lowered the risk of vertebral fracture in post-menopausal women by 68%. Reclast, a rival drug from Novartis, reduces the risk of fracture by 70%. 

World Markets

Asian stocks, like their U.S. counterparts, plummeted overnight. Hong Kong’s Hang Seng dropped more than 1,000 points, or 5.5%, while Japan’s Nikkei fell 600 points, or nearly 5%.