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Updated from 11:09 a.m. EDT

Stocks in New York were lately off their lows as rumors swirled about the fate of


(AIG) - Get Free Report

and as British bank


(BCS) - Get Free Report

offered some hope for




The major indices lately were trading around the even mark. The

Dow Jones Industrial Average

was up 17 points to 10,934, and the

S&P 500

edged up 4.5 points to 1197. The


was up 5.8 points to 2185.

After brokerage Lehman Brothers filed for bankruptcy protection on Monday, traders shifted their focus to AIG, whose balance sheet is crippled by its sale of insurance on subprime-related securities. Late Monday, the firm suffered a downgrade of its credit ratings by S&P, Moody's and Fitch.

"This is probably the greatest financial crisis since the Great Depression," said Brian Gendreau, investment strategist at ING Investment Management. He said that, as

Fannie Mae



Freddie Mac


, Lehman,

Merrill Lynch


and now AIG are in the hunt for capital, and as global growth slows, the situation requires a strong response from the Federal Reserve. "We're in deep gravel here," he said. "This is a once-in-a-generation, once-in-a-two-generation event."

However, investors briefly took heart as midday approached and rosier reports on the financial sector emerged, and stocks rose up off their lows to trade closer to the baseline.

The major indices began to fluctuate as conflicting


reports emerged about the government's role in a possible AIG bailout. Correspondents David Faber, Steve Liesman and Charlie Gasparino took turns reporting different possibilities for a bailout or buyout of the company.

"Ultimately, AIG will work out," said Neil Hennessy, manager at Hennessy funds. He said that many of AIG's businesses are solid, but insufficiently liquid. As the company formulates a plan to raise capital, the situation will prove favorable for other firms that want to buy solid businesses at reduced prices, he said. "It's just going to take a little doing," he said.

Hennessy said the broader economic situation resembles that of the early 1990s, when a financial crisis claimed hundreds of banks and savings and loans. "We're stomaching the same thing now," he said. He also pointed out that in this environment the market is overreacting to each new headline.

"As much as everyone's gut is tightening and we all look like we've got abs, this is just like a bad kidney stone," he said. "It will pass; it's just going to hurt."

Separately, Barclays said it was in discussions to buy certain of Lehman's assets. The British bank had previously refused an outright acquisition of the company.

Bill Stone, chief investment strategist at PNC Wealth Management, said that there is less worry in the markets if it appears someone can pick up remaining assets after a firm goes bankrupt. He also said that a Barclays purchase of Lehman assets improve the prospects for Lehman's creditors. "At least somebody's finding value in the operations," he said.

A lack of information is the main source of pessimism around AIG and the financial sector, said Bill Stone, chief investment strategist at PNC. He said the company is clearly under a great deal of stress. "We're watching just to see some news."

Ahead of Tuesday's trading, investment bank

Goldman Sachs

reported a 71% drop in third-quarter profit but it still beat Wall Street earnings estimates. During its earnings call, Goldman said that AIG's precarious situation is making it more cautious. The company also said it did not intend to merge with a commercial bank.

"Goldman Sachs' number didn't calm people down necessarily, but ... it wasn't a disaster," said Stone. He said investors are now questioning the business model of standalone brokerages now that Bear Stearns, Lehman and Merrill have now either gone bankrupt or merged with steadier partners.

As financial firms struggled to find new capital and hold on to their remaining cash, the cost of overnight borrowing doubled from 3.33% to 6.44%, its highest rate since 2001.

To help cope with the buckling financial system, the

Federal Reserve


$50 billion

to an overnight repurchasing agreement for the money markets. The liquidity injection comes on top of a $20 billion boost already scheduled and is designed to prop up firms as they deal with mounting credit woes.

Outside the financials space, news wasn't much sunnier. Electronics retailer

Best Buy

(BBY) - Get Free Report

, however, fell short of Wall Street's projections as its fiscal

second-quarter profit declined

19% from a year ago.

Further reflecting a souring tech market, PC maker


(DELL) - Get Free Report

issued a warning

that it foresees decreased demand for the current quarter and expects to incur costs as it adjusts to the tough environment.

In the realm of economic data, the Federal Reserve is expected to decide whether it will cut its target interest rate.

The Bureau of Labor Statistics reported that consumer prices fell 0.1% for August, down from a 0.8% increase in July and in line with economists' expectations. The core rate of price increases came in at 0.2%, down slightly from the previous month.

Shifting to commodities, crude oil was losing $3.57 to $92.14 a barrel. Gold was falling $5.10 to $7881.90 an ounce.

Longer-dated U.S. Treasury securities were climbing in price. The 10-year note was up 5/32 to yield 3.37%, and the 30-year was up 6/32, yielding 4.01%. The dollar was falling vs. the yen and up slightly against the euro and pound.

Abroad, markets such as the FTSE in London and the Dax in Frankfurt were trading lower.