Stocks, dollar rise on report of AIG loan

By Herbert Lash

NEW YORK (Reuters) - U.S. stocks rose on Tuesday after a report said the Federal Reserve may provide battered insurer AIG a loan, capping a wild day in which investors dumped risky assets like equities, oil and emerging market assets and piled into safe-haven government debt.

Fears that American International Group Inc might file for bankruptcy rocked global markets that already were shaken by this week's sale of Merrill Lynch & Co to Bank of America Corp and Lehman Brothers' bankruptcy filing.

Bloomberg, citing a person familiar with negotiations, reported that the Fed was mulling a loan package for AIG.

U.S. stocks rallied and the dollar rose to a session high against the yen on the AIG loan speculation, while U.S. government debt prices turned lower following the Fed's afternoon decision to hold interest rates unchanged.

"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 closed up 141.51 points, or 1.30 percent, at 11,059.02. The Standard & Poor's 500 Index gained 20.90 points, or 1.75 percent, at 1,213.60. The Nasdaq Composite Index added 27.99 points, or 1.28 percent, at 2,207.90.

The S&P financial index gained 6.2 percent, and the KBW Banks index rose 7.3 percent.

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.

Oil prices dropped another 5 percent to a seven-month low, for the steepest two-day slide in crude since 2004, while gold ended lower in volatile trade, pressured by jittery investors who sold to cover losses in other markets.

Platinum plummeted 9.2 percent as panicked investors liquidated futures positions in a search for cash. Emerging markets suffered big sell-offs, with Russian shares tumbling in the biggest one-day fall in a decade. Trading was suspended for an hour, and the MICEX index ended the day down 17.75 percent.

"People are getting out of commodities and getting into safer havens, like bonds," said Andy Lebow, a broker at MF Global in New York.

After posting gains for much of the day, however, U.S. Treasury prices fell as U.S. share prices turned high late in the day.

The benchmark 10-year U.S. Treasury note fell 37/32 to yield 3.54 percent. The 30-year U.S. Treasury bond fell 44/32 to yield at 4.12 percent.