* Fed mulling loan package for AIG -Bloomberg report
* Fed keeps interest rates unchanged
* Dow up 1.3 pct, S&P up 1.8 pct, Nasdaq up 1.3 pct
(Updates to close)
By Kristina Cooke
NEW YORK, Sept 16 (Reuters) - U.S. stocks clawed back from
their biggest drop in seven years on Tuesday on growing
optimism that U.S. authorities may finance a rescue of insurer
American International Group <AIG.N>.
A report late in the session that the Federal Reserve was
considering a loan to AIG pulled the market out of a funk. The
market had been lower after the U.S. central bank disappointed
investors by opting not to cut interest rates as many
expected.
Financial shares, rebounding from their worst day ever on
Monday, led the market higher after the Bloomberg report on
possible Fed involvement in resolving the crisis surrounding
AIG. The insurer's credit ratings were downgraded late Monday,
adding to concern about its ability to raise capital to help
weather fast-mounting credit losses.
Adding to optimism, a source told Reuters that Barclays
<BARC.L> will buy the U.S. broker-dealer business of Lehman
Brothers Holdings Inc<LEH.N><LEH.P>, which filed for
bankruptcy Monday and helped trigger a global rout in equity
markets.
The Federal Reserve held its key benchmark U.S. interest
rate steady on Tuesday, opting for the time being to soothe
rattled financial markets with central bank lending facilities
rather than rate cuts.
"There is some confidence coming back into the market
about AIG and hopefully, we've seen the worst of it," said
Giri Cherukuri, head trader at OakBrook Investments LLC.
"There's news of help for AIG and news of Lehman selling one
of its units, which the financials are reacting very
positively to."
The Dow Jones industrial average <> rose 141.51
points, or 1.30 percent, to 11,059.02, while the Standard &
Poor's 500 Index <.SPX> gained 20.90 points, or 1.75 percent,
to 1,213.60. The Nasdaq Composite Index <> was up 27.99
points, or 1.28 percent, at 2,207.90.
Financials continued to rally after the closing bell.
Morgan Stanley shares rose more than 7 percent after reporting
stronger-than-expected quarterly results.
AIG shares, under heavy pressure for days, hit a low of
$1.25 early in the session, but then pared the worst of its
losses. It ended down 21.2 percent at $3.75.
At one time, AIG was the world's largest insurer based on
market value.
Among other financial companies, Wells Fargo <WFC.N>
shares jumped 12.7 percent to $34.93, while Bank of America
<BAC.N> rose 11.3 percent to $29.55.
But shares of Goldman Sachs Group Inc <GS.N> fell 1.8
percent to $133.01 after the investment bank said quarterly
profit plunged 70 percent as the worst market slump in decades
led to weaker-than-expected revenues.
Hewlett-Packard Co <HPQ.N> rose 6.8 percent to $48.41 and
ranked among the stocks giving the biggest boost to the Dow.
HP's chief financial officer told the Bank of America
investment conference in San Francisco that the company is
"very confident" it can hit its current quarter profit target,
despite currency headwinds and ongoing weakness in its printer
business.
Also helping the market, oil prices tumbled and ended down
nearly 5 percent, dropping for the second day in a row. U.S.
crude futures <CLc1> lost $4.56 to settle at $91.15 a barrel.
Lower oil prices helped fuel-cost sensitive airlines and
retailers. An airline stock index <.XAL> ended up 11.5
percent. The S&P retail index <.RLX> advanced 0.8 percent.
The stock of computer maker Dell Inc <DELL.O>, fell 11.2
percent to $15.98, and was a top drag on the Nasdaq. The
company said it was seeing softer global demand for
technology.
Consumer electronics retailer Best Buy Co <BBY.N> posted a
steeper-than-expected drop in quarterly profit as it spent
more than planned to bolster its stores, sending shares down
2.8 percent to $42.46.
Trading was active on the New York Stock Exchange, with
about 2.2 billion shares changing hands, above last year's
estimated daily average of roughly 1.9 billion, while on
Nasdaq, about 3.2 billion shares traded, also far above last
year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones on the NYSE by
17 to 15, while advancers beat decliners on the Nasdaq by
about 4 to 3.
(Reporting by Kristina Cooke; Editing by Jan Paschal)
