Stocks Erase Worst of Losses

The selling at home begat selling overseas. Tokyo's Nikkei 225 fell 2%, and Hong Kong's Hang Seng plummeted 3.3%. London's FTSE was worse by 4.1%, and Frankfurt's DAX dropped 2.4%.

"Now investors will have to look towards the foreign markets for tomorrow's direction," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "That might add some stability to the U.S. market tomorrow, but it's still too premature to say that we're over and done with declines."

Pavlik added that the volatility will most likely remain because the market is trading on momentum. "There wasn't anything in the fundamentals to back up this shift in late-day trading, so we'll have to see if the buyers keep bargain-hunting tomorrow," he said.

Earlier, the Federal Reserve poured an additional $17 billion into the U.S. financial system through two separate repurchase operations that will extend over the next 14 days.

Meanwhile, St. Louis Fed President William Poole told Bloomberg that subprime mortgage woes are still not a threat to the U.S. economy. Only a "calamity," he said, would prompt the Fed to cut interest rates.

Treasury prices were rallying as investors scrambled for a safe haven. The 10-year note was higher by 31/32 in price, cutting the yield to 4.60%, and the 30-year bond rose 1 & 19/32, yielding 4.92%. The dollar sank against the yen and euro.

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