Updated from 1:24 p.m. EDT

Stocks in the U.S. were building on modest gains Wednesday after

Lehman Brothers

( LEH) outlined plans to bolster its capital levels as it deals with increasing losses related to the credit crisis.

The

Dow Jones Industrial Average

was gaining 122 points at 11,353, and the

S&P 500

added 15 points to 1,240. The

Nasdaq

climbed 29 points to 2,239.

Taking center stage early Wednesday,

Lehman announced a plan

to sell a majority stake in its investment-management division and likely report a third-quarter loss of $3.9 billion. Lehman also said it plans to spin off its commercial real-estate assets into a new company and slash its annual dividend to 5 cents a share from 68 cents.

Separately, Korea Development Bank, which had been considering buying a stake in the New York firm, ended talks to purchase an interest. Shares of Lehman, which lost some 45% in Tuesday's session, were lately trading near the baseline.

Elsewhere, Standard & Poor's said it would remove

Fannie Mae

( FNM) and

Freddie Mac

( FRE) from the S&P 500 index after the close of trading. The government over the weekend announced plans to seize the two mortgage giants, whose exposure to the credit and housing crises threatened the U.S. financial system.

Further indicating worries, Keefe Bruyette launched a salvo of ratings downgrades at nine banks, including

BB&T

(BBT) - Get Report

,

Bank of America

(BAC) - Get Report

and

Fifth Third

(FITB) - Get Report

.

Kansas Bankers Surety

, a subsidiary of

Berkshire Hathaway

( BRKA), also stopped insuring bank deposits that exceed levels guaranteed by the government.

Shares of

Washington Mutual

(WM) - Get Report

dropped 22% as credit concerns mounted

and a

Bloomberg

report indicated that changes to accounting rules may have hindered its chances to merge.

"The market is still very skeptical, very cautious with respect to the goings-on in the financial sector. In some ways, that can be good if we actually get a reaction, news that's better than expected," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.

Sparks said most of the recent volatility has been to the downside, as the market has given back strong opens in recent weeks. "Until we know more about until we see some positive things come out of the financial arena ... it's going to be a very bumpy ride," he said.

"Because we're in such a volatile market that has no sustained trends, the short term trends ... tend to be magnified. And I think that's the market trying to chase trends in any way they can," said Sparks. He added that until the market offers a more stable trend, volatility and quick short-term trades will continue to prevail in the market.

Outside the financials, shipping firm

FedEx

(FDX) - Get Report

said its fiscal first-quarter profit would exceed estimates while reaffirming its yearly earnings guidance.

The Wall Street Journal

also reported that the Pentagon canceled its air-tanker competition. The Pentagon said it couldn't decide to award a contract to

Boeing

(BA) - Get Report

or

Northrop Grumman

(NOC) - Get Report

and

European Aeronautic Defense Systems

, the

Journal

said.

Meanwhile, chipmaker

Texas Instruments

(TXN) - Get Report

raised the low end of its earnings guidance for the third quarter. Meanwhile,

Research In Motion

( RIMM) unveiled its

BlackBerry Pearl Flip 8220

, a flip or "clamshell" version of its popular Blackberry Pearl smartphone to be released in the fall.

In the biotech space,

ImClone

(IMCL)

announced it

received a buyout bid

that trumped a $60-per-share bid from

Bristol-Myers Squibb

(BMY) - Get Report

. ImClone did not name the buyer.

Switching to commodities, crude oil was down 53 cents to $102.73 a barrel. OPEC announced it was reducing oil production by 520,000 barrels a day in response to what it said was an over-supplied market.

The Energy Information Administration reported that crude oil inventories for the week ended Sept. 6 declined by 5.9 million barrels, a greater decline than expected by analysts. Gasoline inventories fell by 6.5 million barrels.

Longer-dated U.S. Treasury notes were falling in price. The 10-year was down 15/32 to yield 3.62%, and the 30-year lost 23/32, yielding 4.21%. The dollar was gathering strength vs. the euro, yen and pound. Gold lost $19.50 to settle at 762.50.

Foreign markets such as the FTSE in London, and the Dax in Frankfurt were trading lower. The Nikkei in Japan and the Hang Seng in Hong Kong ended the trading day in Asia lower.