Updated from 9:22 a.m. EDT

U.S. stocks dropped sharply at the open Wednesday, after the

Federal Reserve

agreed to back and take over insurance giant

AIG

(AIG) - Get American International Group, Inc. Report

.

The

Dow Jones Industrial Average

fell 199 points to 10,860, and the

S&P 500

slumped 23 points to 1190. The

Nasdaq

stumbled 39 points to 2168.

On Tuesday, the major indices ended a volatile day with strong gains. A reported decision by the Federal Reserve to provide a loan package to AIG accompanied stocks' late move to the upside. During earlier trading that day, government officials had said they wouldn't provide a bailout package for the company.

After trading closed Tuesday, the

Fed

reversed its earlier decision and agreed to offer AIG an $85 billion bridge loan to bail out the company. In exchange, the government will essentially get a 79.9% equity position in AIG and will charge a hefty interest rate.

Treasury Secretary Henry Paulson also stipulated that AIG CEO Robert Willumstad resign. Edward Liddy, former CEO of

Allstate

(ALL) - Get Allstate Corporation Report

, will replace Willumstad.

Earlier in the week, brokerage

Lehman Brothers

(LEH)

TheStreet Recommends

filed for bankruptcy and

Bank of America

(BAC) - Get Bank of America Corp Report

staged a last-minute acquisition of

Merrill Lynch

(MER)

. Fearing AIG may be next, investors sold the stock down 60% on Monday, then dropped it another 21% on Tuesday.

Late Tuesday, investment bank

Morgan Stanley

(MS) - Get Morgan Stanley (MS) Report

reported profits

that declined 7.7% year over year but beat expectations. Morgan Stanley had been facing pressure as other financial firms buckled.

Elsewhere, British bank

Barclays

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announced it would buy Lehman's North American businesses.

In the technology sector, memory-chip maker

SanDisk

(SNDK)

rebuffed a $5.8 billion buyout bid by

Samsung Electronics

, saying Samsung has undervalued its business.

As for commodities, crude oil was adding $2.37 to $93.52 a barrel, and gold gained $5.90 to $786.40 an ounce.

In terms of economic data, the Census Bureau reported that building permits in the U.S. fell 6.2% to an annual rate of 895,000 -- a 17-year low -- in August. Economists were expecting a more modest decline to a rate of 925,000. Housing starts also dropped to 895,000, shy of analysts' forecasts for 950,000 new homes. The Energy Information Administration also is expected to release its weekly read on crude-oil inventory levels.

Longer-term U.S. Treasuries were rising. The 10-year was up 16/32 to yield 3.38%, and the 30-year was gaining 1-22/32, yielding 4%. The dollar was edging higher vs. the euro, but declining against the yen and pound.

Overseas, European exchanges were gaining falling, as the FTSE in London and Dax in Frankfurt took losses. The Nikkei in Japan closed higher, while Hong Kong's Hang Seng finished on the downside.